Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
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They could maintain a public list of YC companies that abide by the code of conduct in order to encourage good behavior, and to help communicate to potential employees that they would get a “fair” option deal (as early investors, they would clearly have access to the terms of any financing deal).
[EDIT: they could also maybe publish a list of investors who have committed to following the guidelines, and consider excluding VC firms from YC events if they won’t commit to those standards]
Depending on how serious YC was about making a difference here, going against the code of conduct might even be grounds for exclusion from the YC community? My understanding is that YC has always focused on what’s best for the founders, even when they were the outsiders in silicon valley and at their own financial expense. Maybe now that YC is such an important player in the silicon valley ecosystem, they could use that power to maintain the health of that ecosystem in a way that few others could?
That's more of an admonishment, but at least they recognized the problem ...
Yes, we care a lot about making employee equity more generous and more fair. Part of our YC curriculum now is teaching founders about these issues and encouraging them to follow best practices around being generous and transparent with employees about equity compensation like Sam discussed in his blog post.
I think there is still a lot more we can do, though.
Speaking as a bigco eng who would love to join a startup, but is disillusioned by the economics of it.
I would be happy to spend an hour on a call with you and provide my very humble suggestions, if you're up for it. My HN username at gmail.
Edit: of course we can do this over email, too. I just feel that in the year of Covid, you don't throw away an opportunity for a warmer human connection.
My impression is that the one thing that will make a significant change in this is that private shares are liquid in secondary markets like Forge or Sharespost. It would be revolutionary to also valuate companies from the perspective of employees, being able to pick winners and negotiate more stock from the not-so-winners, where stock is worth less.
If recruiters explained that yes, we don't actually shaft you in their message, I might actually take a look.
- The employee equity participates at the highest prefered equity pool.
- The employee option strike price will always mirror the lowest 409A valuation while the option is open.
- Vested employee options are valid for 100 years while illiquid, and 7 years post liquidity event.
- Modifications to employee equity pools resulting in a decrease in option value as the result of a funding round must be accompanied by a tender offer of 70% of the pre-funding option value.
The above terms wouldn't provide much value if employees didn't understand that the companies equity is better than a competing employers equity.
The startup is doing well - it recently raised ~$300m at a ~$3b valuation, but my options expire in Dec 2023 and I'm growing increasingly concerned that they won't have a liquidity event before then.
If I exercise my options before then it will be taxed as income which could leave me owing >$100k in taxes to the IRS - but if the company hasn't yet had a liquidity event then I can't sell the options to pay that.
Seems like a ridiculous situation for early employees/advisors to be placed in.
Sounds like you're dealing in an ISO quantity beyond the limits my mind can comprehend though.
https://www.esofund.com/blog/amt-tax
Regardless, they'll still have to front the $ to exercise and be left with illiquid stock. It's not a good situation.
https://www.kiplinger.com/article/taxes/t055-c000-s001-the-a...
The common stock (what you probably get for your options) is usually valued at significantly less than the valuation from the latest raise.
When paying taxes on your equity compensation, the amount you owe is based on the 409A.
Investors set the price for preferred stock in various "rounds," so a company kinda knows what its preferred shares are worth.
But common stock usually isn't traded in any kind of market (until liquidity), so there's no obvious way to know what its FMV is.
A 409a valuation is a "professional" assessment of the value (price) of a share of common stock, which a company's board can safely use to determine the FMV of its common stock.
Anyway GGP is right that the amount subject to tax at exercise will be the difference between your option strike price (which was set based on FMV on the date your grant was issued) and the FMV of common stock on the date of exercise.
The FMV of common stock is almost always less than the price of preferred stock, though the two prices do converge as a company grows and gets closer to liquidity.
The nastiness of AMT is another huge reason the startup stock option game has become worthless/-ve worth to most people who have been in this industry long enough to know better. With Trump's Tax Reforms, this has somewhat lessened, but it's still a huge problem.
Source: I work at Secfi (https://secfi.com) and our equity and tax advisors are amazing.
Non-recourse financing in this context means that in the event that shares (which are held as collateral) became worthless there is no personal recourse. I.e. your savings, house and whatnot are not on the hook. The contract is just dissolved.
In this scenario you spend $0 of your own money on exercise.
The "catch" is that you'll have to share the upside in case of a better outcome (according to pre-agreed rates). But the reality is that it's still a better option than just waiting for IPO/acquisition to exercise and sell shares at the same time (so called cashless exercise) [1].
[1] My colleague, Vieje, twitted a great case study on this topic: https://twitter.com/viejep/status/1306364614720909312
Might be best to stop using this idiom.
I was diluted from 3.2% to about 1.3% but the value of the company had clearly risen so _at that point_ it was unimportant.
However in my opinion the company's burn rate and lack of growth clearly meant a later exit (likely an acqui-hire IMO) would have seen dilution without an equivalent growth in value, not to mention the ever-increasing VC non-dilution shares accelerating that.
I got majorly screwed on tax because the startup made no efforts to be efficient and were very chaotic in their arrangements for payout so that is definitely another important factor.
Overall by winning the startup share lottery I made roughly $500k for 5 or so years working there and that was as employee #1 so the maths given the pay cut probably don't work out too well (perhaps break even if I'd played the career game well).
However of course I am hugely grateful it happened and I got to see a startup grow from 3 people to more than 10x that and learnt a lot, as well as changing my coding career direction substantially.
I wouldn't recommend joining a startup as a non-founder other than for changing career or starting out. The trade-offs don't really make sense in most cases and you get a lot less say than you think you might (founders understandably want to control what is their baby) - never do it for the money.
note: I posted a more detailed overview of what happened at https://news.ycombinator.com/item?id=25496667
Isn't that just like normal stock options?
I think I've seen this called a "virtual option plan".
With more shares created/sold later, the dilution means when the options mature, they will be less than 1% of the total company shareholding, or value.
There is some room for them to dilute the shares out of existence. Notably I don't have to exercise them, I already "own" them. The vesting schedule is really more of a forfeiture schedule. If I leave after a year, I forfeit 3/4s of them. Otherwise, they're mine into perpetuity, until liquidation.
I am not an accountant, so please correct me if I'm wrong.
There's one thing that some of these articles claim that isn't quite right. Because this arrangement technically makes employees in a partnership, per the IRS this means they have to pay their own side of social security and isn't entitled to e.g. health insurance. It turns out the department of labor has issued conflicting guidance: if I am, for all intents and purposes, employed by a company, then I am to be paid as a W2 employee and am entitled to benefits. My company has chosen to follow the department of labor's guidance.
So when do you get this equity? Is it only at a liquidity event?
Because normally you pay taxes when you get something of value, equity in this case but you can't always sell said equity due to your company being private.
I'm assuming your company is private as a public company doesn't have these issues, they just give you stock, you sell stock, everyone is happy.
Or put another way, how does this setup not give you a tax bill each year, assuming you get your equity each year, that you have to pay with your own cash?
My company is an LLC. In a sense, I have this equity. This is how the value is defined:
Value = Percent_Of_Shares *(Current_Price_Of_Company - Price_of_Company_At_Time_Of_Issuance)
Note that, on the day these issued to me, the value here is equal to zero, because the current price of company is equal to the price of company at time they are issued. Thus, I have received something which has no value, and thus have no tax burden. Technically I'm now a partner in the LLC.
This has tax implications: when the company is making money, I owe tax money on that. However, they're in growth mode, and losing money, which means I get to carry a tax writeoff. Further, it's written into the company's bylaws that if they make money, they're obligated to give employees a distribution equal to the tax burden that the employee will incur, i.e. when there is a tax burden outside of a liquidation event, they are obligated to give me enough money to cover it. Also, if they sell the company, my shares are vested immediately. I don't know what happens to them covering the taxes if I leave; maybe I become liable for it, and there's a downside there.
The shares are non transferrable, which is lame but apparently quite standard.
I get the tax advantages of this, though. But I expect if it became common the taxman would want their cut of the nominal growth in value each year, or something. Bastards.
This doesn't happen in the real world.
When more shares are issued, it's because you've raised another capital round and the new shares go directly to the new shareholders (new VCs) and future employees who haven't yet been hired.
New shares wouldn't go to the founders.
Yes, it's hypothetically possible, but it doesn't happen in the real world.
> In the last year, we have seen, on more than one occasion, a behavior among later-stage VCs that we’ve rarely observed in the years before
Which seems to imply it's not a common practice. As I mentioned, it's 100% theoretically possible to do it, but the percent of companies that actually do it is very low.
It would be not only bad for early employees, but also bad for early investors - it would hurt the founders reputation among their early investors (and employees) which most founders wouldn't be willing to do.
But founders with shareholding may (do) work with later investors to their joint benefit, screwing over other early shareholders or investors. With VC money holding shares already, that is not so likely to happen - unless it is the VC buying-in more equity. However, smaller enterprises with startup beginnings are very likely to follow this pattern, as later investors (and perhaps greedy founders) do not care about those that came before.
Sounds like a bit of a moral hazard / principal agent problem for founders!
Usually in conjunction with a new round, but not always.
The company will do a massive 'down round' - even lower than what they really want, bring on new investors. Then issue shares to current staff founders.
That is de-facto like handing over equity from previous staff to new investors - you could almost do the math for how much 'old employees' stock was sold to new investors wherein said old employees didn't get a dime.
It's generally going to happen in negative situations, but that happens a lot.
Edit: and it's not something your ever going to hear about, it's obviously not something leadership wants anyone to know about. Even 'former employees' who were washed out may not find out - how would they? They're not entitled to be notified upon new issuance of shares.
It is most common when potential investors have most of the leverage, but there are some holdout stakeholders which can also sink the round.
Ultimately it was the right call from the company survival perspective -- everyone who was severely diluted (including early investors) at least still have something worth more than $0.
In private companies, always remember: (1) control ≠ equity (2) equity ≠ profit (3) equity ≠ information.
If this is new to you read Brad Feld's Venture Deals book and do the online course, it's time well invested.
Note this is simply the nature of private equity. Companies go public to drink at the capitalisation trough of public markets, but the cost is regulation and increased transparency. Companies that stay private are rarely bound by significant rules in terms of board or management decisions redefining structure, equity, terms and so forth. There are at least four key firewalls (exercise, issue, share class, transfer) between "options" as issued or promised and meaningful equity value extraction for an employee. Good lawyers can probably name five more, and definitely dream up or deploy tens more at any time without breaking laws.
In the end, I walked away with less than I hoped but more than I think I deserved (for being so naive). But it's been an abject lesson since: nothing in a private company is fixed, it can all be changed according to who pulls the strings. Options and equity are very vulnerable to this. Having equity is no guarantee of power or even a seat at the table (or of future wealth).
In retrospect I'm pretty sure all I did was buy myself a tax burden when they fold or pocket change when they exit.
The mistake I made was not realizing the parent comment: that I lack the information to make an informed decision or to be sure they don't just dilute to oblivion. The numbers I did have access to (above) communicated a very misleading story to me.
(BTW: Congress bailed out dot-com specu-vestors who claimed not to understand the tax event that occurrs when exercising options. https://www.mercurynews.com/2008/11/10/rescue-bill-offers-re... )
Everybody gets an upvote button and a downvote button from day 1, and they'll downvote to oblivion anything they don't instantly resonate with. It turns every large-ish subreddit into an echo chamber pretty quickly
It’s a cliched observation but it really does remind me of the kids hoping to make it big in pro sports – there are way more who peak at the minor league level at best but the owners make a ton of money by encouraging everyone to think of the exceptions as the rule. Humans are prone to misjudging statistics in general and that’s really bad when one party has the best data and a strong incentive for other people to misjudge it.
The catch is usually when people are asking about RSUs of public companies or other relatively liquid and predictable compensation, in which case equity comp should definitely not be valued at $0.
I'm pretty sure I had the exact same experience. I've been a part of three startups. One took nothing more than seed money and has been chugging along for over 15 years. It's a lifestyle business for the owner, so it also hasn't grown at all in over 10 years. The other two startups were both acquired. I was even a VP at one with over 1% equity in the company. Net value of my options was $0 after investors, credit holders, and founders got paid.
Yes, some folks are going to make millions from IPOs, but the opportunity cost is far too high (IMHO). As a VP at the startup, my total compensation with 15 years of experience wasn't a whole lot more (and less, in many cases) than what a new college grad makes nowadays.
Now that I've got a family, college to pay for at some point in the near future, and a retirement to fund, I'll gladly take the sure thing vs. the gamble. I've bid goodbye to startups and have quadrupled my income in doing so.
People are way too obsessed with dilution because it sounds so scary. "With the stroke of a pen they can create a billion more shares and your percentage goes from 5% to 0.01%"
The reality is that all common shareholders have the same incentive to not dilute the outstanding shares. That almost always includes the founders. Outside of a money raise most of the people involved in the company are aligned in the desire to not dilute each other.
The major source of dilution is new fundraising and while it will effect your percentage of ownership it typically doesn't affect the value of your stake because the dilution is part of post-money valuation. So you might own 1% of a $10m company before the dilution and 0.5% of a $20m company after the dilution but the value of your holding didn't change.
The things people should be worried about are all the shenanigans that happen around participating preferred multiples. Or, the worst, 30-day exercise windows along with the tax treatment of options exercise/AMT. But since those are much more opaque concepts it's way harder to get people riled up about it.
And if you have an unscrupulous CEO there's basically nothing you can do to protect yourself as a worker. But that's way different from the normal dilution you get as part of raising money.
If that is indeed true, then there's almost no reason not to demand being paid in real cash money rather than stock options. If the company doubles in value and I have the same amount of money, then what's the point of getting options instead of USD?
This like saying, "don't worry, your lotto ticket won't be devalued: We'll make sure that even if those numbers win the jackpot, you'll still get the same $2 and it won't be diluted below that."
Huh? You should compare the current value of the options to their value at the last fundraising round, not between pre- and post-money in the same round.
The doubling in value happen between (e.g.) the Series A raise and the Series B raise, not at the time of the Series B raise, and when you compare the value of your options between the raises that's when you'll see the increase in value.
For example, imagine you have 10% of the company and after the Series A raise the company is valued at $1m, so your share is $100k. Now you go and work for two years and increase the value of the company to $20m (pre-money). Your 10% is worth $2m now. If the company raises $5m for 20% ($25m post-money) in a Series B you now have 8.3% of the company (you were diluted) but your 8.3% is still worth $2m.
The stock option reward happens while you're building the company.
To take your example: my hypothetical 10% isn't worth $2m -- it's worth an unknown amount (one hopes more than the $100k it started at). Only after somebody is willing to pay $5m for 20% of the company can one realistically say what my (now 8.2%) shares are worth.
The poster I was replying to seemed to think that the act of raising money is what should increase the value of your shares, which is not the case.
See here for more info on how the terms are used: https://www.investopedia.com/ask/answers/difference-between-...
Nope. If you are topped up (which means you still have political standing) then you start a new vesting schedule. So all those shares you worked for and vested — you can work for again!! Yay! Until another 4 years you are diluted. Yay! But likely there will be another round while you wait to vest the shares you already had!! Hahahaha!
Unless you're talking about the cap table being completely wiped but that's a different scenario and I wouldn't consider that to be part of dilution.
they only have the same incentive to not dilute if they are getting the same penalty for diluting, right?
I am not an expert in any of this but it seems they could just agree to issue a ton of shares to all the investors / founders but not to employees in a way where everyone except the employees benefit.
Say I want to sell common stock that I own, to someone who meets the SEC accredited investor definition. It seems that right of first refusal means that the company could buy the stock instead, but it would have to be at the price that I set with the external investor. In that case, don't I as an employee get liquidity either way, since it's being bought at the agreed upon price?
(In the options exercise agreement): "All certificates evidencing shares purchased under this agreement shall bear the following legend: "The shares represented hereby may not be sold, assigned, ..., except in compliance with the terms of a written agreement between the company and the registered holder...""
(On the share certificate): "This certificate and the shares represented hereby are issued and shall be held subject to all ... bylaws of the corporation, to all of which each holder ... agrees to be bound"
Either of which seems to give the company the ability to unilaterally reject any transfer/sale of shares.
In my opinion selling within the existing pool shouldn't be restricted, but this could become a sticky issue around board control so that probably contributes to the desire to control/curtail it.
Correct. The problem is a lot of companies go further. They restrict sales completely. In practice, insiders are allowed to purchase at depressed prices in tenders from time to time and then resell at a mark-up in the open markets.
I left the company because my salary was incredibly low relative other companies in the same area.
I have left and I have no possibility of exercising the options. I technically could but that would mean ~50% of my net worth in a single risky investiment.
So yeah, I now price stock options at zero.
Aren’t RSUs taxed at the time of grant? Therefore in a refresh grant, the employee would get hit with a large tax bill on the fair market price of the equity, even with an 83(b) election. Most people probably don’t have that kind of money to lay down up front on something that could still go bust. At least with options, you can always (unless you get fired) stay long enough to see the come through to IPO where options are then a sure thing. Am I missing something here on the quote above?
Not the times I've had them - they were always taxed at time of vesting. There's always an option (or at least I was always offered an option) to sell back some of the stock at the time to cover the tax, even if you weren't exercising the remainder right away. That way there was no out-of-pocket cost to you at the time of vesting (but you did have the option to keep all the RSU's and pay the tax due if you wanted to).
Usually, some portion of the vested RSUs are sold to cover the tax liability, and the rest go into your investment account. The tax rate is the same as regular income.
We had a couple of choices to pay the taxes: the default was that the employer would buy back some of the stock and use that cash to pay the taxes. Employees would get to keep 70-some percent of the stock. The other option was that employees could write the company a check for the taxes shortly before vesting, and then keep all of the stock.
Why would you expect options to pay big for a non-unicorn? Unicorn means the startup investment succeeded in its goal. No one gets rich when their investment fails.
> Why would you expect options to pay big for a non-unicorn?
I think the idea is that there should be a good swath of successful startups between "failed" and "unicorn". Indeed, the whole name unicorn came about because they used to be incredibly rare. So the parent is really asking "If you were in a moderately successful startup, did you get anything out of your equity?"
If you choose a company that ends up achieving a 500 million valuation as engineer #100, then your time will be wasted, massively. You will end up making no or -ve amounts of money.
Having said that there are significant protections in UK law for employee share schemes
My situation is far more common than the people making millions from unicorns at IPO.
The majority of exits don't come from IPOs. They come from acquisitions of small-ish companies by big or medium size companies. These don't make headlines because they're not very noteworthy for the average person.
That first check alone more than tripled my money - and came with a cap table, too, so I could see the $1m+ payouts to each founder as a nice little lesson in the disparity between founder and early-employee outcomes.
Not that I'm complaining - this has turned into the single highest-performing investment I've ever made :) Career-wise it launched me into the big leagues. A+, would do it all again.
The only other startup that paid me equity money, I got enough to buy a used motorcycle. Yay.
At this point, joining as a seed-round or series A employee seems like a sucker's bet if you're expecting equity to be worth anything.
Many IPO-track companies are growing fast and attracting serious investment, so they pay engineers top dollar. They want to maximize chances of getting to IPO so they don’t benefit from cutting corners on a few engineers.
If you have The opportunity to join an actual IPO-track company then go for it. The catch is that many startups will claim to be headed for IPO, so you have to look at actual growth and TAM and make your own judgments.
Even in the optimistic case of an exit, whether it be an acquisition or IPO, the risk incurred by the employees is way too high because of the lengthening of time towards the exit event. The lucky ones can get non-recourse loans and cash out with something to show for their efforts, but the overwhelming majority can't, and end up having to shell out real money for what are essentially rolls of the dice or losing that equity altogether.
It's interesting that if a person has vested stock with nominal value of $100 and exercise price of $5, he can't use that stock in lieu of the $5! i.e., he can't walk away with $95 worth of his grant. I wonder if there are IRS regulations that bar this type of arrangement.
Most employees don't need or want a share of the company. They want a share of the profits or proceeds from an exit.
For example, a company can allocate 20% of all in-the-money proceeds from an exit to the Employee Exit Share pool. An employee's share of that Exit pool will be based on their employee-months worked divided by the total employee-months worked in the company, with every one year of employee months worked counting an additional time for the purposes of calculation. This thus rewards early employees and those who have worked for longer durations with a larger share.
End of the day, I want to be holding the same type of shares of the founders because I know that our interest are aligned.
Anything that is worth caring about from a legal perspective can be addressed through means of a guaranteed profit and exit share versus the less tangible and more easily screwed around with common shares, in which employee and founder interests are in many ways not aligned.
Each stock is a slice, more stocks, then each slice is smaller.
Now - if the company is growing you get 'diluted' but those stocks are worth more.
But in the examples above where employees are getting 'less/not diluted' it must be at the expense of someone else: founders or older investors who won't like that.
Given that founders, old investors and staff all generally get diluted at the same rate, dilution is actually one of the more fair things that happens in companies at least superficially.
So you create $100 more and now they own 50% (at $200 valuation). This means the investors either over-paid (2x what they were worth!), or you were strongly under-valuing the stocks that existed before.
If you dilute, they get 50% at $50, and the existing stocks are now worth 50% their value. Because you literally sold half the company.
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The first is pretty obviously ridiculous. Nobody would pay 2x the worth, that's the point of deciding on a value. If they paid 2x, it just means you didn't agree on the value.
But if they don't over-pay, it's the same as the second: prior to the sale, your company's value was actually $200 (you were just claiming otherwise), and after the sale your employees only have $100, i.e. half the company's value. Their stocks were still diluted.
You can sell 50% of each persons stake, or all of one person's stake, or something else. Without dilution, it would be a founders job to convince the other employees that giving up some of their shares was necessary (assuming the employee equity pool was the only source, but s/employees/other investors for the same result in general), and individual investors or employees could make that choice. Dilution allows certain investors to make that decision on behalf of other investors.
If I wanted to invest in 1% of a company, I want to be in control of that choice, not have someone else modify my investment to be smaller (even if the $-value stays the same, that defeats the point of my investment!)
You certainly could make a company where that's the default contract. But your fundraising negotiations will probably be quite a bit harder, as a lot more parties will be at the table.
Now your CEO has to horse trade with every investor in the round, and also every existing investor and every employee. Everyone who agrees to the scheme effectively gets diluted, but anyone who refused to go along effectively gets a "free" anti-dilution adjustment. So the incentives are all wonky.
I expect that the major differences you'd see are that you would need some kind of large pool of stock in reserve to save for future investments (or yes, to do buybacks which would give employees/investors early liquidity opportunities with each new round).
This way, at least, you aren't being lied to when they say you'll get X% of the company. My entire point here is that employees don't have enough representation in these kinds of negotiations, and thus almost always end with the shortest stick. So systematic changes, even if those changes make startups harder, are necessary to make them broadly enticing.
I agree with your basic premise of some of the problems, I just don't see this as a practical way of addressing them. I can imagine explicit buybacks etc., as you suggest, but all those mechanisms will probably the funding side in similar ways to getting rid of liquidation preference.
Keeping a reserve stock for future investment is plausible (may give accounting headaches) but anything you do can't plan for all eventualities; when you are running out of money and all stock is committed you have a problem.
(whether or not that equals "founder-only dilution", I dunno. kinda? it's earmarking, it's at least mentally/structurally different)
Buybacks... I haven't personally seen them occur except to take more control back from investors or employees (e.g. to pay off the one(s) that won't agree to dilution), but either way that's the opposite of receiving funds / dilution as it costs the company money.
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I agree entirely that the argument for non-dilutable stocks is "... otherwise the value of the rest of your shares may go to $0". But unless they get voting power proportionate to their stock (like normal) or can be forced to accept buyouts, one person can decide to risk everything for everyone. Or do nothing, and benefit from non-dilution while everyone else gets diluted. Again: it's possible to do this! Founders often have exactly this kind of power! But I don't see that working in most cases for larger groups.
Certainly it helps that there’s a deluge of liquidity in the financial markets right now that has completely changed the calculus from even just a year ago. I would certainly be much more optimistic now than any other recent point in time if you work at a company with good growth prospects.
I cashed out $500k pre-tax as employee #1 at ~1.3% post-dilution but pre-IPO with the startup valued at $35M so had the company been valued at a sub-unicorny $350M or so it would have made me a millionaire. Just wondering how the % numbers compare.
I think given the overall situation I came out of it well, but it does go to show that even when you do hit the startup share lottery as we both have the actual cash outcome can vary by a significant factor, though we are both lucky to have made cash given the 99.9% of startups whose shares end up worthless.
[1]https://finance.yahoo.com/news/day-market-history-google-ipo...
It's basic math: You can give more equity to early employees when you have fewer of them.
We have more services, frameworks, and technologies available to quickly build companies than ever before. Ironically, it somehow takes more engineers than ever to ship most products. The surface area and expectations for a modern product have grown substantially. Gone are the days when a couple of people would throw together a quick and ugly Rails application and then start trying to sell it to customers.
I wish we'd see more startups bucking the trend of doing complicated React websites with complex backends that look like someone was trying to use as many AWS product offerings as possible. Unfortunately, it's increasingly difficult to convince engineers to focus on the easy, simple problems. Everyone wants things to be as complex as possible so they can pad their resumes for the next job, whether or not the product calls for it.
Another factor is that interest rates are incredibly low right now. The cost of capital is so low that startup founders will often take excessive amounts of investment to grow faster and pad their runways. When it comes time for acquisition talks, the founders negotiate million-dollar "retention bonuses" with the acquiring company if their shares are worthless due excessive dilution and liquidation preferences. Works out well for founders, while employees get nothing.
But that is not true. If you look at the startups of the late 90's-- the time when people learned that stock options could be very valuable-- it took a lot of engineers and infrastructure to make a tech start up. As you point out more services and frameworks exist now.
The reason why it takes more employees is the reason cited in the paper, companies stay private longer to make more money for growth investors.
I agree completely with your point about the impact on employees. It's just that its not because the product requires it, it is because investors want the private growth.
However, I'm curious if the other side of the business has grown with all the growth hacking marketing, sales floors that now seem like boiler rooms, etc...
I am sure RSA are and will always be available to those with the skilleset that commands this level of compensation. I am unclear what would motivate the founding team or investors in a start-up to act otherwise.
Stock options used to be that differentiator for startups... now it's just an empty promise in most places.
Larger companies not only offer better compensation, but usually offer much better career development, responsibility growth, training and “learn by doing” opportunities.
The startup will promise you won’t be blocked by bureaucracy and as an early hire you can lead the design. Total lies. The bureaucracy and dysfunction will be even worse and probably involve a bunch of immature egos and “the design” will be endlessly compromised to get each successive round of diluting funding that yokes you to more and more traditional management bureaucracy through VCs.
After experiencing the special hell of unrestrained founders who don’t know what they are doing and nepotism hires all through middle management, most people quickly realize it’s an insane trap and wish for the comfort of large firm bureaucracy, where at least there’s some minimal policy protection against sexual harassment or cultivating alcoholism as a company value or generally grinding unwitting young people into the ground with 80 hour weeks.
It’s like a professor who did happen to get tenure listening to all the post docs talking about how awful academia is. I’m happy for that one lottery winner but their experience doesn’t count for anything.
Most startups are dynamic, most big corporations are not. They are 'big' because they are sitting on a value chain monopoly.
The same chocolate bars have been in my grocery aisle for 20 years. Variations on the same soap.
Some startups are very poorly run, but most are not led by 'unrestrained jerks'.
If you are going to a startup and doing a very rote, repetitive thing, then you're not very lucky, but most startup jobs are definitely not that.
The risk is that there is 'too much dynamism' and people and up spinning their wheels, over pivoting, crashing. But that's definitely 'dynamic'.
Early non-founder employees do tend to get screwed relative to the business vultures who show up later, the CTO getting $10 million/year brought on after the company has gone public but did nothing to get it there is just wasteful corporate cronyism.
My own experience with after 8 years at various London startups is one of career stagnation because (for various personal reasons) I don't have a personality that lets me thrive in these environments.
If you work at a startup the trick is you have to take the 5% of your work that’s interesting and try to make it seem like that was the 95%, when in reality the 95% is doing all the grunt work because the company cannot scale staffing to distribute that work evenly or according to specialization.
Usually the opposite.
At many large companies, people are frozen in operating jobs, and almost 'do' nothing.
Bell Canada (like Verizon), massive organization full of staff graft.
Companies that have a lock on revenue, fat monopolies, are where people park themselves.
Directories with large teams that do almost nothing. Years to make the smallest change in customer service inquiries etc..
The 'real' advantage at working at a startup, in my view - is that you actually get to 'do stuff'.
So when you say you don't work at a startup for monetary reasons, and that you don't care about shares, which has an expected value of real money despite the uncertain outcome, it's natural to wonder if you don't care about compensation aka money.
Founders shouldn't be exiting with massive rewards when the risk they took was only marginally higher than early employees.
Yeah, I enjoyed my time there and I learned a lot. But a mismanaged company shouldn't reward the management and leave employees with nothing after all is said and done.
Pay me a million for something I don't care about in a bad environment and I won't do good work.
Pay me 50k (I make more, but 50k is a good value for a good living here in the region) and let me do something I like in a fun environment and I get things done.
As much as I agree with the "lottery ticket" mentality, this line of thinking has been popular to parrot on HN for at least 5-10 years. And as far as I'm aware, startups don't have much trouble attracting senior talent. So until that changes significantly, they are going to continue offering lower salaries and bigger lottery tickets for as long as they can. Why would they do otherwise?
That seems like a pretty broad assessment to make on a hunch.
RSAs and RSUs are far less liquid than equity. They can typically only be sold into a company-wide liquidity event.
Once the valuation is higher, RSUs can shield employees from paying taxes until a liquidity event.
Often the founders have done very little of value before hiring a team to actually build the company. These people toil away, a decade later, the founder makes 20-100 million, the first employee, a few hundred thousand.
There are exceptions, but this is largely what it is.
In theory it would make more financial sense that most companies at the startup stage would be fully employee-owned, considering the equity and tax scenarios. But what founders are open to that? It amazes me that still there are/were people, myself included, willing to partake in a rigged endeavor plagued with pitfalls and restrictions, compared to other business models out there.
Pretty much all companies start doing this once they get large-ish (snap, airbnb, lyft, uber, etc. all did essentially the same thing).
At the valuation stripe has, I'm not seeing the downside, given that the upside of options is limited once you're the size of stripe today.
> but to me it seems that this is another way of screwing employees by denying them stock appreciation on their initial grant
How? If I'm granted 100 RSUs, and the company value doubles, my RSU value doubles. Fixed # of RSU is the better way (imo) in comparison to fixed dollar amount grants.
I meant that it is fixed dollar amount not fixed RSU count per year at Stripe, if that helps clear it
I feel really fortunate to have had what Steve calls a 20th century deal in the 21st century. I was able to maintain an undiluted share of the company, which interestingly I was never able to do in the 20th century.
You'll have a much better chance of making money on stock and stock options if you join an already-public company that has an ESPP and regularly grants stock options for their publicly-traded stock as incentives to the employees.
The big tech monsters have all the talent and unless the nature of the game changes it will be that way for the foreseeable future and tons of great ideas will die on the vine.
(Obvious you should talk to a tax professional rather than taking advice from a random stranger on the internet before taking any action.)
As a business owner and VC I’d be extremely reluctant to offer that to employees.
When cosco buys apples from a farmer for $1 and resells them for $2, they are effectively taking a 50% revenue share.
A referral bonus for bringing in a new customer is also a kind of revenue share for the existing customer, and plenty of startups do those.
I think the key is to compensate based on a revenue share of what you bring in, rather than of the total revenue.
I do think profit sharing would be a good lever for a bootstrapped company that is already profitable and wants to give key employees skin in the game.
Salespeople and sales partners are often compensated with a sales based commission, which is a revenue sharing scheme. It's common and expected, and practiced everywhere there's deal flow.
Technical people can rarely prove "ownership" of revenue, so they can't leverage that in negotiation and are left with "general" ownership through options or RSUs or whatever. There's nothing inherent or natural (or unnatural) about it. If money flows through you, you can usually demand to keep some of it. If it doesn't, you usually can't.
Maybe we geeks should let the sales teams run Powerpoint presentations instead of the actual product to address that misunderstanding.
With sales, it is very easy to tell which specific people are responsible for any specific deal. That's why sales compensation usually includes a share of revenue.
With product development, unless you have a very small team working on the product, it's nearly impossible to tell which specific people were responsible for a specific chunk of revenue. When someone buys a product, it's hard to determine which specific features were responsible for the deal.
Imma technical role that relationship isn't there as much. Sometimes one can implement a feature a specific customer (group) wants, sometimes a specific bug fix, but most of the time the value an individual enginees brings in is not separable.
In most profitable software companies, it is indeed shared with through bonuses and RSUs, but it is not a well defined / easy to understand revenue share or profit share scheme.
[0]: https://en.wikipedia.org/wiki/Tom%C3%A1%C5%A1_Ba%C5%A5a
One example I'm thinking of is Josh Elman who seemingly got into the VC game just on having worked at three companies that went on to IPO (LinkedIn, Twitter, FB) and so that was a track record that could stand in place of an investment record. It doesn't seem that impressive to me to have known that those three companies were going to do well, even pre-IPO. But is that repeatable?
Basically, if you are getting into top tier startups then a lot of your lottery tickets hit at least a little bit. Sure, nothing beats a FAANG salary for average financial gain.
But even little hits do a lot to even out the lower paying years.
I've been getting equity since 2005 and my experience is that there are a lot of winners around me. Is that just luck (to some extent, I'm sure). But could a person gauge a bit whether they are in the in-crowd of companies that seem likely to do well? Options for the first 50-100 employees do make a meaningful difference in someone's life, so you can join a company pretty late and have a pretty good sense of their traction.
I had or have equity in Odeo which would have led to Twitter stock if I'd stayed longer, Calm, Medium, Beyond Meat. I turned away Pinterest's corp dev when they were hunting to acquire a mobile team (not sure how serious, but I think we would have been a good team for them). So, that's a lot of winners that either actually hit, seem like they might hit, or that I was very close to.
I had equity in Wesabe which I think would have been Intuit's acquisition target if Mint (an abnormally excellently executed startup) hadn't gotten their first. That would have been $500k to me. Also had equity in Branch, acquired by FB and Neighborland. Those are the "losers."
I keep a loose accounting of how my friends did too, which is also a big part of why it feels like I've been working inside of an in-crowd. I started and then shut down a two person company. That other person went to Yammer (employee 70-ish) and made a big chunk of money. Wesable's CEO ended up VPE at Etsy and Stripe pre-IPO. That Stripe equity has got to be massive. A lot of the Wesabe team has done a stint at Stripe. The VP of Product at Odeo was the VP of something as Fitbit IPOd. The Branch founders got the FB acquisition and also had some Beyond stock. The people who've left my current company have all landed in good places including Squad which just got acquired by Twitter. A lot of my former team is at Medium (which I'm close enough to to feel pretty confident is a winner). Our employee #1 went on to be employee #57 at Pinterest.
Again, I'm not comparing this to FAANG. But I never wanted to work for those companies. Instead, I wanted to work for startups because that's what interested me. But I also want to be able to retire and own my home and so for me, Options, are a big part of the mix that made that possible.
Eero is a perfect example: https://mashable.com/article/amazon-eero-wifi-router-sale/
The new trick is for founders to do side negotiations at acquisition time if the shares would be worthless due to dilution and liquidation preference. For example, the Eero executives got cash bonuses of $225K to $608K for closing the acquisition, with parachute payments of up to $7.1 million for staying on after acquisition. Meanwhile, employee stock options were worthless despite the $100 million exit.
https://www.theglobeandmail.com/business/article-element-ai-...
Element AI sold for $230-million as founders saw value mostly wiped out, document reveals
https://www.theglobeandmail.com/business/article-element-ai-...
I joined a startup as employee #1 and though I opted to have slightly more salary than shares I ended up with 3.2% of the shares.
I was with the startup long enough to fully vest and left with actual shares rather than share options (a product of me joining when the startup was just founded and had no share option scheme).
After I left at I believe the 3rd or 4th VC funding round an offer was made to buy my shares by a VC who wanted more ordinary stock to convert into a new series B non-dilution higher priority share class. All of the VC shares were of course non-dilutable.
I accepted the offer (I didn't have faith the company would IPO and felt the most likely exit - an acquihire - would come when I was far more diluted at far lower value) and after a very poorly communicated and drawn out process ("we'll pay you next week" for 4 months) I finally received payment valuing the company at around $35M at a diluted share holding of 1.3% netting roughly $500k gross.
Throughout I was assured that I would only have to pay a capital gains tax (I'm in the UK) and additionally received faulty independent advice that confirmed that this was the case, however 1 day before payment I was told that I'd have to pay roughly half at income tax and the other half via capital gains (the latter tops out at 20% in the UK so this was a huge difference and cost me $55k+).
This was done by the startup withholding the income tax and paying it directly on my behalf via the UK's Pay As You Earn (PAYE) scheme while leaving me to pay the capital gains later.
In the end I had to pay roughly 1/3 of the payout in tax netting me ~$350k.
I was paid out 7 years after I joined the company.
Overall I feel the dilution _was_ offset by the increase in value of the company, and the % I received was fair as to my contributions, but the tax arrangements were handled very poorly indeed and gave no room for a more efficient arrangement.
Given that I felt the shares were no more than lottery ticket toilet paper + suspected I'd get cheated in some way even if there was a payout the outcome was really really good and unexpected, and have in fact changed my life (I can now buy a house after years of misspending!)
But I definitely don't think the economics work out too well. I was paid probably half of the proper wage throughout and put up with a lot before vesting, having stayed there for 5 yrs that works out to $100k extra a year on top of the smaller salary (started at $50k roughly) - a FAANG or such would probably have paid the same by the end.
However at the time I joined I worked in a very unmarketable (and soul destroying) role and the position helped me change my career direction, gave me a lot of good experience and ended up paying out anyway.
I'd not work at a startup again (not only for salary vs. equity concerns) but I don't regret having worked at one.
Something of a stream of consciousness but perhaps it provides some kind of raw data to add to the pile!
Also, as you mention a $USD, did you receive UK EMI options?
Thanks for sharing!
Ultimately I would have preferred to know in advance even if the tax had to be paid this way and had the option to discuss and obtain advice on how to proceed rather than be lied to and have tax withheld with 1 day's notice.
However given the general chaotic and disorganised nature of the startup their poor handling was not at all a surprise.
I think the moral of the story is even if you are lucky enough to cash out don't expect the company to do 'the right thing' in any way. It is really out of your hands.
I had fully vested shares not options so EMI didn't come into it.
I had never considered it this way in the past, but in the 70’s, productivity started decoupling massively from productivity gains.
I.e. the best people at finance (meritocracy) figured out how to capture all the new earnings relative to the workers (who didn’t know this game was going on).
This has snowballed into a situation where the financial meritocracy is competing with itself and could now never imagine a situation where non-finance people are being paid more in proportion with their value relative to baseline productivity gains.
This article would fit that narrative as a symptom of one-upmanship gone amuck.
How do we exit this brutal cycle? It requires a generation of new blood that is actually concerned about societal stability and recognizes the connection between instability and leaving 99% of folks behind as games are fought in ‘the ivory cloud’.
Will this be dealt with sans revolution? Who knows...
I’m sorry gig workers, contractors, Amazon warehouse workers, startup workers, but there’s not much to see here. We’ll try to be better later if we get lucky enough to get a whole new industry again.
Are you insinuating it has nothing to do with executive wages ballooning (CEO compensation growing nearly 1,000% since the 1970's) and is instead because women are working?
Its US women vs the global S&P list, but it is interesting to compare, now that you mention it.
[1]https://aflcio.org/paywatch
[2]https://www.catalyst.org/research/womens-earnings-the-pay-ga....
[3]https://www.catalyst.org/research/women-in-the-workforce-uni....
That is $7 billion to CEOs vs $3.5 Trillion for women.
For example Tim Cook earns 133M/yr which is $976 per employee. ... and this probably massively overstates the figure due to contractors.
Or Sundar Pichai with $86M/yr which is $676 per employee (again... not counting contractors).
Obviously it's more if you include more executives, but the number of top executive companies is basically a constant and at large companies it still ends up being not very large per employee.
This isn't to say that it isn't a concern but I don't see how to justify the belief that the executive compensation at large companies is a major factor in the overall wage market.
It depends on the class of workers. I'd agree with you w/r/t most wage earners being paid in transparent manner. But I think the GP comment was referring to technology workers (given the context of HN.) In the case of tech workers, many are paid in very complex ways.
If you have illiquid stock options in a private company, and especially if you have taken a below-market salary as many startup employees have, your compensation is about as complex as a CDO. Just like a CDO there are multiple tiers above you that need to be paid out before you ever get paid.
Unlike a CDO, where you can actually pull up the details on the tiers above you (tranches), at startups as employees, you dont get to see the cap table, so the whole maze is invisible too!
Worse, unlike a CDO where you can sell at any time, here you have to exercise and hold stock for some far-away liquidity event that usually doesnt happen. So you have an invisible maze, and then a pot of gold at the end, perhaps. Or not.
I think this is part of the startup mythos. At the three startups I've worked at (~10 people), none of us had to sacrifice competitive salaries for stock options. The options were on top to incentivize staying at the company longer.
I wonder how common it actually is for people to take significant paycuts in 2020 for a startup opportunity (founders aside)
I don’t know where you’re from, but in SF amongst my circles, senior engineer market rate is about 300-500k but most startups will only pay 150-225k salary so that’s a huge pay cut. However, the base salaries are same, but you can pay your rent, mortgage, or student loans with the public company RSUs.
That’s why it’s bullshit when employees get told they get common shares while investors get preferred because employees take salary and therefore less risk. If you’re walking away from 200k per year of public stock that you could instantly sell on the public market and buy real estate with, you are in fact taking a huge risk and a pay cut. Trying to pretend like you’re not and that the startup is paying a “competitive salary” is a sleight of hand used in 2020 to fool naive engineers.
1. Level up your career / role flexibility. 2. Big companies suck (but [big] startups can suck too). 3. Burning idea you want to get done / tech is interesting. 4. Lottery tickets (options).
The big difference is that the publicly traded companies can pay RSUs worth money NOW.
Given that so many of the hot startups are in the Bay, I'd say only fresh college grads are looking at remotely similar comp between the two. Everyone else is playing the options lottery.
I think it's still super common in general, although perhaps not in the bay area.
Does this map to reality? Are you saying that if you were at Google making 250K in TC the Startups were paying you 250K Base salary + stock options? That seems ludicrous.
There are no competitively paid senior+ swes that keep their comp going to a startup. Full stop.
Illiquid equity makes a significant difference too. We’re talking total realizable dollars earned in a year.
It’s worth noting that I’m not saying this is fundamentally broken - that’s just the design of the system.
I've never heard it adequately explained why employees should accept this state of affairs. Not only is the cap table invisible, but the fully-diluted cap table and terms of dilution and many other terms and conditions are also hidden from non-founders/investors at most startups I've read about. I've heard so many stories of shares getting diluted right out from under employees immediately before a liquidity event that it has become a trope. IMHO that's not investing into a startup; that's buying a lottery ticket.
What am I missing here about typical startup stock options where the same terms and conditions founders and investors see are not accessible to employees?
There is always the chance you’ll get super lucky, but investors and founders have become experts at extracting the maximum possible portion of the value created. To the point where there isn’t a whole lot left for anyone else. Workers included.
It is the same as acting and sports -- people look the handful of winners, ignore the field of dropouts, and think they too can become a winner. They see AirBNB and think their startup is the next AirBNB.
Also much like acting and sports, there are a constant stream of new entrants who have not learned the lessons.
I want to be fair here -- I work at a startup and I love it. But I value my equity at zero and nothing more. I chose to work at a startup because I get to do cross-functional work rather than get stuck into a silo of a silo at a large company. I took a significant paycut from a large company salary and a significant upside cut from when I was a founder in exchange for more accelerated learning and exposure to all parts of the company.
That sounds like the general software startup industry has built their own version of video game industry goggles; glamorize the startup lifestyle and culture so much millions of kids will compete with each other into a race to the bottom. There's probably some succinct German compound word for this dynamic and if there isn't, I hope some German speakers can suggest some here so I can add it to my lexicon.
Anecdotally, in the Software field there is a lot of "price anchoring" where a large employer decides that a software engineer makes ~125k, and both smaller/peer employers decide that a software engineer makes 125k +/- 10%.
From past experience the base "going rate" in a given market doesn't seem to change all that much unless a large employer decides to change the going rate because a higher or lower price point better suits their business - other companies will set their salaries to the baseline. Big Tech has recently been dragging wages up across the board by both hiring in volume, and paying more than everyone else.
I'd be curious if anyone has a formal study on price anchoring in wage negotiations.
If you combine this with one employer bordering on a monopsony for buying a particular category of labor - then pay won't move in proportion to productivity.
Even at the low end, six months of tooling work from a $100k coder can often put a handful of $50k/year white collar employees permanently out of work (or make them twice as productive as before). If one company doesn't realize that, another eventually will. It's not too tough to pull in ~50-100k/year running a SaaS business or freelancing
Things in the USA are really broken in the retail sector. Companies pay the absolute bare minimum that will keep them in business, and make up for a lot of the terrible morale issues that come along with that using Orwellian management systems
Could achieve financial independence in 2 years
The unfortunate consequence of the taboo of salary discussions is young software engineers not knowing how much they can actually make.
I think the damning thing is that it has. Just not for the workers. wages for high level executives for example not only kept up, it's gone so high that they can't even invest their money anymore. they're complaining about the lack of got investment opportunities instead, sitting on their billions which destroys their society even more by keeping the money from circulation.
In the USA, there has been a (relative) decrease in labor supply due to women leaving the work force. Women's participation in the labor force by percentage has decreased over the past twenty years.
If you were born before between 1935 and 1955, this might have affected your career progression. Maybe. Because the more workers meant a bigger economy and therefore more jobs overall. If you were born before 1925 or after 1975, it had zero effect.
I don't think the point has anything to do with the complexity of the wages, but how workers are generally hired and paid, and how work is now structured, compared to the 70s, e.g. nowadays there are more contractors than ever, taking a good chunk of the wages as they act as intermediaries between customers and the workers who, otherwise, would have to be hired directly by the customers themselves.
I'm curious though about why would you think that illegal immigration is driving wages down. Undocumented immigrants make barely for 3% of the total US population [1], and that does not account for those who cannot work (elderly, children, disabled, etc.) Same goes for women, as the general issue is that household income is in decline, in relative terms to the economy [2].
Automation should also be making consumer products cheaper and more available, but prices are not going down at the same speed as wages need to go up.
[1] https://www.brookings.edu/policy2020/votervital/how-many-und...
[2] https://www.mckinsey.com/~/media/McKinsey/Featured%20Insight...
I wouldn’t be surprised if one of the reasons you simply can’t survive on one person per household working, as in the 60s and 70s, is simply that two people are willing to work now and spend all their free cash on mortgage payments.
No one talks about this. I’d love to hear the debates. I’d love to be proved wrong.
It seems to be completely FUBAR to me. In Japan, housing ISN'T a glamorous investment, and I think that helps the house pricing situation a lot.. You can get a nice apartment in the fanciest part of downtown Tokyo for cheaper than a dangerous hole in the wall in San Jose
You can't live in a share of stock, though it may appreciate faster than a house. (You also generally speaking can't use leverage to purchase shares). But even if shares appreciate faster than homes, they don't feed into conspicuous consumption: and that matters to some segment of the population.
[1] Raze, rebuild, repeat: why Japan knocks down its houses after 30 years: https://www.theguardian.com/cities/2017/nov/16/japan-reusabl...
I wouldn't say it has no influence, but it's probably difficult to state with much precision how great the effect is.
Why would you love that? It's 100% a factor. One of the key drivers of house price increases has been two-income households, with the nice double personal tax allowances, that allow much higher offers. Additionally in the UK I think it became illegal for mortgage companies to offer a lower multiplier on the second income, so it's a huge boost.
I think you meant "wages started decoupling ...", right?
The bigger factor is that per-worker productivity is amplified immensely by technology. Historically, businesses needed to scale their employee base nearly linearly with the number of customers. If you were in the business of building houses or growing produce, your economies of scale topped out early. If you want to serve more customers, you have to hire more people to do the work.
In the technology era, the marginal cost of additional customers is minuscule. Netflix has to pay marginally more for bandwidth and licensing fees with each additional customer, but the number of employees necessary to support a growing customer base is minuscule. Even physical goods can have automated production as they scale up, so physical workers are less and less necessary as scale grows.
For the jobs that remain, supply and demand still dominates the equation. Engineer salaries have been pushed upward because demand for engineering work exceeds supply. Factory worker salaries have been flat or gone down because demand for [domestic] manual labor is decreasing, meaning more people are willing to work for lower compensation just to take those jobs.
Try as they might, the financial people can’t simply break the laws of supply and demand. If they try to keep so much of the profits that their wages fall below other companies, employees will simply leave for higher paying jobs. If the company raises wages so much that they need to charge customers more, their customers will simply leave for lower cost competitors.
This behavior is more intuitive when you put yourself in the shoes of the decision makers. If you called a plumbing company to fix your drain and they quote you a price 2X that of the competitor but claim that it’s because they pay their plumbers more, are you going to gladly take it? Or would you just call any number of alternatives that will charge you market rate costs? (If you are among the few who would gladly pay more for the same service, ask yourself how the general population would behave)
There are numerous financial products and services available to only the wealthy that reduce tax burden and increase wealth and income that are inaccessible to anyone else, create little value, and are predicated on the concentration of wealth in the hands of a few.
Just a random example, if you can afford to buy a home in cash, you shouldn't because the mortgage terms the banks will offer you are too good to pass up - you'll come out ahead just by taking on low interest debt and accounting for the rise in the home's value plus the more lucrative investments you can make with the cash.
In other words, the people who get the most help are the ones who need it the least. That is the travesty of contemporary finance.
When the critique of the financial system is made its not in place of supply and demand for labor but the fact it creates very little besides disparity. The god of liquidity should not be worshipped so much.
There is also additional pressure at the low end: Being poor is expensive, especially in a society with low solidarity.
Besides debt being a potential burden, there are many things that you don't have access to. You can't buy in bulk, you can't buy quality gear, a season ticket, a home, You simply cannot invest, even if that made sense in the long term for you, your community, society etc.
Here's some data:
https://www.pewsocialtrends.org/2020/01/09/trends-in-income-...
Something is driving down wealth at the low end while driving it up at the high end. It seems unlikely in the extreme that this a reflection of actual value produced by people at the high end relative to those at the low end. Much more likely is that this is a reflection of some kind of structural problem in the system that is being perpetuated by the people at the high end using the political power that being at the high end affords them. Whether those people are "bankers" or are better described by some other label is kind of irrelevant. It's the overall dynamic that matters.
For example, you may not get the following explanation much, even though it requires no conspiracies and explains the outcomes: income is disproportionate because risk and capital are more important to a business' success than any particular individual's labour, and so they are correspondingly rewarded more as well.
The real difficulty is in deciding who "gets credit" for producing a given thing. Is the person driving the tractor really more productive, or is the tractor itself responsible for producing most of the value (return on capital)? Maybe the bank that provided the loan for the tractor is creating value? Without any of those components, the food wouldn't be grown, so there's not an obvious way to divide it into the sum of individual contributions.
Exactly. The situation we currently have is that the people who are getting the most "credit" as you put it are by and large the same small group of people who make the rules for who gets the credit. "Bankers" is a convenient popular label for those people even though most of them don't actually work at banks.
Has been there been any detailed breakdown of how much more effective the median CEO in 2020 is over the median executive in 1970? I am certain they are doing things better, have more data, etc but what scale are we really looking at here?
Because, just thinking out loud here, the bulk of the workforce in the United States is more educated and has more hard skills than their predecessors did in 1970s. Firms demanded technology skills, for which they provided little or no training, and their workforce was able to acquire the necessary skills.. and yet the "upside" was nothing more than possibly being able to keep their job.
Effectiveness isn't the measure, exactly, it's how replaceable the CEO is, and the same is true of any employee. If everyone is more educated (and education may be nothing to do with what's required, incidentally), then people are still just as replaceable.
I have no good answers, as I definitely think there are pros and cons to modern executive teams, but it starts with replaceability.
The key takeaway is that that boards set the compensation based on the average compensation CEOs at peer companies, but performance isn't equally distributed. Essentially, the highest performing CEOs pull up the mean, and so the average and below average CEO compensation goes up.
[0] https://www.wsj.com/articles/ceo-pay-and-performance-dont-ma...
You can't do a Tesla without PayPal exit level of money, you can't do a PayPal without zip2 exit money and you can't make a zip2 without a real estate agent footing the initial bills
It's financial levers all the way down
In that case even if all CEOs are equivalent getting hired is a lottery ticket
Nothing is driving wealth down. Wealth is increasing for everyone, generally speaking. This observation is important because it recognizes that wealth is created, not allocated. This is not a zero-sum game.
You say it seems unlikely that actual value is increasing at the high end but I do not think this opinion holds up to scrutiny. I think it is very likely that value at the high end has increased by multiples -- white collar jobs have become vastly more productive with the introduction of technology. Correspondingly, low value work has not. In fact, many of our most common low value jobs (retail, driving) risk going the way of the switchboard operator. There was no conspiracy to devalue the work of the switchboard operator; rather, so called "high value" tech jobs made this type of lower value work entirely obsolete.
I think it is unsurprising that high end work is rising in relative value while low end work is falling. I don't see any basis for imagining political or economic conspiracies: What we see in terms of value is exactly what we ought to expect.
That depends a lot on how you count. See:
https://fred.stlouisfed.org/series/WFRBLB50107
The average net worth of the bottom 50% over the last 30 years is about the same as it was 30 years ago.
Compare to:
https://fred.stlouisfed.org/series/WFRBLT01026
and note that the net worth of the top 1% has been increasing more or less monotonically for the last 30 years, with only a very small dip in 2008-2012.
The bottom 50% take a much bigger share of the losses and a much smaller share of the gains. Over the last 30 years the bottom 50% has barely broken even.
For example, suppose you have a car that you paid $20K in cash for this year. That works out to about $10K 30 years ago (I think the Fed charts you showed are in inflation-adjusted dollars, though they don't say so). So as far as monetary vaue is concerned, you have the same net worth in your $20K car today as a person 30 years ago would have in a car that cost $10K then. (Or even a car that cost $20K then, if we aren't adjusting cost for inflation.)
Having owned cars over this entire time period, however, I can tell you that the wealth contained in that $20K car today is quite a bit greater than the wealth contained in a car that cost $10K 30 years ago. A $20K car today will be more reliable, get better gas mileage and give better average performance, have numerous safety features that didn't even exist 30 years ago, and have more bells and whistles in general. So in terms of wealth, I'm quite a bit more wealthy with $20K worth of car today than a person 30 years ago would be with the same inflation-adjusted monetary value of car.
And cars are actually a pretty poor example as compared with, say, computers or phones.
[1] https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...
Also, even in the CPI, they don't do "hedonic adjustments", which is what you are describing, for all goods. For example, I mentioned cars and computers; the only adjustments made for those items are "cost based adjustments". And many items don't even get those.
Then there's the question of whether the methodology they are using for making "hedonic adjustments" where they are making them actually captures what it claims to capture, which is, to say the least, not something everyone agrees on.
I think this depends on where you get your health care and education, but I agree that in many cases quality vs. price is certainly not where it should be.
> Inflation-adjusted money is a pretty good proxy for wealth. What else is there?
Not trying to centrally plan an entire country's economy based on faulty proxies for something that cannot be reliably measured [1]. Central planning just makes it easier for the rich to siphon more wealth from everyone else while disguising it as "helping".
For example, if we take your observation about quality vs. price for health care and education as true, and compare it to my observation about cars and computers, the general pattern is that the areas where quality vs. price is worst are the areas that are the most centrally planned, and the areas where quality vs. price is best are the areas that are least centrally planned.
([1] - The reason wealth cannot be reliably measured is that it's subjective; the value of a good or service depends on who has it and what use they can make of it. This is the only reason wealth can be increased by specialization and trade in the firt place.)
I apologize because I don't mean to only present disagreements but I don't think this is true, either.
I think that like-for-like health care has largely fallen in cost. The catch with health care is that we've developed better (and much more expensive) methods. Spending has increased dramatically. My grandparents grew up on a farm and when they broke a bone they set it at home. They saw a doctor on very rare occasions and when they did, treatment was limited. Their health care spending was very small, but so was the scope of their treatment. When my grandparents got cancer, they died. There were not nearly so many expensive options available for end of life ailments.
It's possible to live with the same kind of spartan health care today, but almost no one would because we are fantastically more wealthy than past generations.
Willingness to buy more is exactly what we would expect to see if wealth has risen over time, as I am arguing. The status quo rises dramatically as overall wealth increases.
Education is tricky as it's largely a fashion product at this point. Knowledge itself is often freely available in ways impossible to imagine decades ago. It's the prestige and pedigree that cost money. Fashionable limited-quantity things get wildly expensive as wealth increases.
No, I don't think that it does. The bottom 50% generally do not have savings and investments - they invest their wealth in tangibles: Housing, food, belongings.
It is not meaningful to look at investments or savings as a measure of wealth when most people near the bottom do not and have never had those things. It's necessary to look at what does signify wealth in this class: Consumption and physical belongings.
For example, when we look at the average square footage of a home for the bottom 50% we see dramatic increases over the last century -- because wealth in the bottom 50% has had a dramatic increase.
Income is not the dominant factor in whether or not someone lives paycheck to paycheck. People live this way with startlingly high incomes.
> Although the economy is a complex system and it's dangerous to try to over-simplify, my personal opinion is that there are two main and intertwined causes:
1) the cost to participate in the US court system.
2) the abuse of copyright, patent, trademark, and contract[1] law to divorce workers from their experience and treat employee knowledge as company property.
The time and money involved in both pursuing and defending court cases favors larger entities with armies of lawyers and large war chests. Intellectual "property" cases take especially vast amounts of resources because of the fuzziness involved. Meanwhile, treating workers as fungible producers of ideas that can be bought and sold both reduces the bargaining power of individual workers while empowering companies that can amass large portfolios of patents, etc. to use in litigation.
Not sure about reforms for the court system, but patent and copyright reform, combined with restrictions on unfair employment contracts, would go a long way to improving the situation.
[1] NDAs, NCAs, etc.
Most humans have an aversion to death and destruction: we get attached to people, institutions, ideas, employers, basically things that we can count on existing. Economics doesn't care though. If a new way of doing things is more efficient than the old, the market will select for the new way, regardless of the human suffering it causes. And since most humans are averse to causing suffering, they won't be willing to capitalize on this opportunity, which leaves large opportunities available to those who say "To hell with institutions, there's a more efficient way and I'm going to bring it to the masses." They (and the SWEs, SREs, UX, data scientists, etc. who help them) then reap large windfalls as they cannibalize large portions of the economy and throw the now-useless workers out of work.
This model explains nearly everything about the past decade. The downside is that it suggests that "revolution" - rather than being an angry but illogical reaction of a few disgruntled workers - is actually an inevitable consequence of the destruction of the old society. Political systems are embedded in the economic realities that birthed them; change economic reality and the economically rational outcome is for those political systems to fall. The same thing happened as industrialization destroyed feudal empires and ushered in the era of nationalism.
Productivity is a ceiling for wages. "Decoupling" implies that, for various reasons, there's been a surplus in the labor market since the 70's.
Only temporarily. Energy today, adjusted for inflation, is actually quite a bit cheaper now than it was even before the early 70s oil crisis.
Lord grant me the confidence of a HN commentor talking about economics :/
https://inflationdata.com/articles/charts/inflation-adjusted...
So, not "Nope".
Also, crude oil is not all there is to "energy". Here are a couple of other charts:
Electricity prices 1960-2011:
https://www.eia.gov/totalenergy/data/annual/showtext.php?t=p...
I was somewhat off about the peak due to the "energy crisis", it was actually in 1983.
Gasoline prices 1929-2015:
https://www.energy.gov/eere/vehicles/fact-915-march-7-2016-a...
This comment section is nothing if not predictable.
Well, sure, but not durably so; the most dramatic examples being a pair of transitory geopolitical events producing short-term supply shocks.
Even if my guess is that YC partners are well intentioned, doing something this radical would make many enemies in the VC ranks, and damage YC in the long run.
I don't know... Perhaps a "revolution", like you're saying.
I mean, for me this is where the problem is, there is no reason to promise a lot of equity to an employee. Pay them well. Now any (private growing) company is well funded, you can afford market salaries.
Also, keep in mind that only a small percentage of FAANG employees have the nosebleed-high comps people frequently quote here. So, we are talking about a small percentage of a small percentage.
It also makes sense from a game theory perspective, If your below market rate employees do not believe in your company or are agnostic to the companies success then the chance that their stock options become worth something will be less. It should also attract more people who understand the value or direction of your company yielding better decisions and hopefully increase their stock option worth.
Again, just theory. but its solid nonetheless
Its to reward taking a riskier job and also for the sweat equity you put in.
You have companies A and B with workers getting $100k in cash and $50k in equity. Company A goes under and B doubles, becoming known as an elite company worth hiring from. Employees from A demand their old wage ($150k) in their new jobs, and if you want to hire folks away from B, you have to match their new wage ($200k). It ratchets its way up as enough people see net wage growth to drag the industry’s competitive comp up.