Understanding Startup Offers
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In the not-so-distant past, start ups were pretty much the only avenue to secure a multiple-million dollar personal liquidity event, in the off chance you join a successful start up, work your tail off, and the company gets to a point where that exit happened (which was and still is rare).
But nowadays, with software development offers being what they are are large public companies with outstanding growth prospects, the argument that you need to join a start up to fast track earning millions is pretty much out the window. Not only do people who are working at large stable companies like Google & Facebook have the generous perks and large company work life balance stability behind them - they are also soundly beating almost all "successful" start up offers in terms of compensation over the long term.
I would love to see some real life practical numbers with start up offers at different stages of funding and how that would really compare to simply working at Google or Facebook over the same time horizon.
It seems the only reasons to work at a start up these days are if you really really love building products, want to wear many different hats, are frustrated by the pace of big companies, and are stifled by the big company processes that dominate the day to day life working at these companies.
Compelling reasons to work for a start up for sure, but compensation is not even in the top 10 reason to join a start up anymore, IMO.
My take is that unless you are very good at judging leadership teams and company prospects, that joining a FAANG or a Series C+ scale-up (and even that takes thoughtful research and luck) is the better play.
Early stage at my past grant levels has to hit a unicorn valuation for the equity to match FAANG packages. I'm not even sure a $1B exit is enough after dilution, investor preferences, and god forbid down/flat rounds. Certainly not at the grants that I started at in my career.
Plus keep in mind that FAANG stock also appreciates. I see some folks not accounting for that growth and only startup valuation growth. Comp packages for mid level ENG and PMs are 400-500k / yr, not even including appreciation!
Unless I'm coming in hot with good equity and an imminent IPO OR I don't need/want the money at all, I can't see going to back to startup life. (I also wouldn't trade that startup experience away, either)
I don’t buy shares on margin, so why would I want my nest egg invested in the company I work for? If I get laid off I’m poor twice over.
I had 0.5% of a startup that just went through a seed round, about 10 years ago. It got acquired by a larger startup that was "going to IPO." Reality is that larger company went through a few down rounds, got bought by a PE firm, barely paid back the initial investors, and I wound up with about $10K (profit.)
Next startup: as the first engineering hire, I got about 5%. After several down rounds, that 5% is now 1%. Several years later, the company valuation is barely 7 figures. I also invested some of my own money into the company (preferred shares) that have declined in value by 90%. I've since moved on, but the odds of even getting my investment back are near zero.
I've done far, far better investing in the stock market.
I think that 'heat' is probably the best way to judge: if they are growing, they have a good product, customers like it, and they're not paying substantially more for customer acquisition - and it's a large market - then that's a good sign.
I'm actually not sure this is true, and wondering if this was reporting bias. When a startup exits for a billion and all the employees get rich, you hear about it on the news, and you can do the equity calculation yourself based on public funding round press releases. When a big company quietly gives a multi-million-$ comp package to a valued employee, they have zero incentive to share that news with the rest of the world.
My wife grew up in Silicon Valley, and somehow all of her friend's parents have large real estate holdings. These were people active in the 70s-90s, big company employees, no exits. But there was one guy who had a beautiful house in the Saratoga foothills with an artificial waterfall between his two swimming pools; "Oh, his dad was a rainmaker at Intel." Or another friend of the family who had made some key inventions at HP, and retired early. Or the innkeeper we met in Alaska who had simply worked big companies in Silicon Valley, no exits, saved his money, but then when he turned 40 he bought a sailboat, sailed around the world with his family, then when he reached Alaska bought 2 old warehouses and converted them into a B&B.
Employee’s vested shares turned out to be worth a lot and so was the real estate employees bought.
The market was ripe and the people were talented. Not so sure there’s much to it then that.
I think that if you're seeking non-average wealth you should first strive to be non-average. There are a number of pathways to exceptional wealth, but all of them require being exceptional in some way.
Being non-average definitely has better results, of course. But if you aren't, I do think there are still pathways for you at startups, while there generally speaking aren't at FAANG level companies.
My anecdotal example that I don't know anyone who made massive/post-economic money by joining a public company. You can probably make six figures easily, and potentially low 7 figures in some years. The only people I know who have mode 8 or 9 figures are people who have joined startups early or relatively early before the IPO, and the startup became a $20-100B company.
Seed stage, as one of the first senior engineers, you might get 2%-0.5% equity. At $20M valuation (common YC valuation at the moment). That's $400k-100k value vesting over 4 years (which might sound low compared to FAANG offers). The point is the upside potential, not the value. FAANG companies might grow 5x in 5 years. Startups can grow much more. That's why the whole VC market exists.
Hitting $1B means the company valuation went up 50x, hitting $10B means 500x, hitting $100B means 5000x. So your initial offer could be worth several millions to hundreds of millions. Even if you join later, when the company is valued $500M-$1B, you might still get 50-100x upside.
The math is more complicated since usually companies raise multiple rounds which then dilutes the existing shareholders. Roughly 20% at seed/series a, and then less after that.
It's easy to understand a FAANG style offer in this context.
You join Google in 2017, you get RSUs pegged at 800$ a share valuation, about 150k$ a year vesting, by 2021 those shares are worth 2800$ so you've earned about 2.1 million (not exactly as taxes come into play).
You join AirBNB in 2017, valued at 30 billion, you get a similar offer, fast forward to today and AirBNB is now worth 100 billion, you might have made 2 million (again, not exactly, considering taxes and potential dilution). And AirBNB is one of Y Combinator's most successful start ups/exits.
From some quick google searching - there are thousands of Y Combinator companies and only ~29 are worth one billion or more. Of those billion, they are all at this time late stage and trying to guess which up and coming Y Combinator company will be next to crack 1 billion is a very risky endeavour.
How does the tax implication of stock options really impact your net gain, and does that practically move the needle for a comparison against a standard FAANG offer?
Would be interesting to look at some cold hard numbers. Absolutely joining a 20M valuation YC company and sticking around until it grows to 1B would be incredibly lucrative - but how lucrative in a practical sense, given real offers? Dilution? Tax implications? Would love to see this analysis.
I joined a seed company w/ a $10m valuation in early 2014, starting offer was 1%. after series a, b, c, and some smaller retention grants, I had about 0.4%. Left before fully vesting, so ended up with 0.3%. Company was acquired for $4b and I made $12m. After taxes, netted about $7.5m
Joined another seed company with $10m valuation in 2016, starting offer was 3%. after a few dilutive funding rounds and some generous retention grants, ended up with 1.2%. Company also acquired for $4b and I made $50m. Will probably have about $35m from this one after tax.
Obviously I was _incredibly_ lucky in picking those two companies, but maybe those numbers shed some light on dilution, taxes, etc. I wouldn't have made anywhere near that much if I'd joined those companies after series a, let alone b or c. I encourage anyone I know who wants to make 7 figures to work for faang for a few years. If they want to make 8 figures, start a company or join as the very first hire (as I did) if you're not willing to take the risk of being a founder.
The phrase serial entrepreneur is often used.
Do you think you significantly affected company trajectory in these two cases or not? Can play around with the definition of “significantly here”.
From a tax perspective, RSU are probably worst. They are taxed on your W-2, effectively a bonus. If you make a lot, you pay max bracket federally and in your state. In California I think it can be ~54%.
Joining seed/pre-seed company that hasn't done a priced round likely is the best. Employees get to buy shares, not options, at the nominal price, often $0.0001 per share. There is no taxes as there is no gain. After a year those turn in to long term shares, and you can hold them forever without paying any taxes. When the company is public, you can borrow money against it so you don't have to sell. If you sell, you pay long term capital gains, and if QSBS still exists and you hold the shares for 5 years, you have $10M tax free federal credit.
With options, it depends on the timing and the cost to exercise. Joining early, and exercising options early, is usually also good since now you own the shares and only had to pay the fair market value which is 20% of the investor valuation. Again now you can hold the shares forever, get QSBS or pay long term capital gains when you eventually sell.
If you join late, likely you should still exercise if you can/want to. If you don't exercise early, then you might have to pay taxes on the gains of the fair market value from the time you were granted the options and the time you exercised. Or you could just hold the options if the company allows. Then after the company is public you can just exercise and sell, and pay the short term capital gains similar to RSU.
If you are self-taught, lacking credentials, and don't live in a major market, it can be difficult to get in the door at a FAANG. Whereas start-ups can be much more likely to take a chance on someone with a non-conventional background.
So for some of us, large corporations aren't even an option until after we've taken that startup job and the startup has done well enough that people have heard of it.
I applied to at least twenty roles at startups and small/medium-sized companies that seemed like a good fit for my skills and wrote thoughtful cover letters for each one. not a single one of those employers responded, not even to reject.
I also applied to a couple FAANGs, thinking it was a pretty long shot. but I ended up getting two on-sites, one of which I converted to an offer. there's definitely some truth to what people say about the unreasonable/irrelevant DS/algo problems, but I found it comforting to know for once what I was actually being assessed on.
not sure whether I got lucky with the FAANGs, unlucky with the smaller companies, or what, but just thought I'd share that anecdote. not the outcome I was expecting at the beginning of the process.
Don't self select out of these jobs. I've been an interviewer at FAANGs. We take talent where we can and count ourselves lucky.
Our recruiters call everyone given enough time. Reach out to one directly on LinkedIn for an even better chance at an initial screening call. Ask for a referral from someone already working there in your wider network. Ask for a referral from Blind. Ask for a referral from HN.
From there it's your ability to pass the interview, not any set of credentials (different thread please on the interview process).
I think the big challenge is that accurately evaluating a startup offer is very, very difficult. And it can be really, really contextual. As an example, I know someone who worked at a company that went public fairly recently, and their result was vastly worse than the EV of a big company, but they also had a below average startup EV because they left the company and didn't purchase all of their options when they left.
With Google or Facebook, the question is really just stock growth and grant sizes.
With startups its growth and grant sizes, yes, and the expected type of liquidity event(s) and the time horizon on that event and your plans and company culture over that time horizon, also any additional funding rounds can markedly affect things and...
I think the challenge is that you're responsible for launching on a feature team at Google, and the lead up to a launch has a ton of work that needs to be done often under tight deadline pressure, plus the codebase is crazy complex. If you're a self-motivated, detail-oriented, slightly obsessive individual of the type Google loves to hire, you're not going to rest until it's all done.
Infrastructure/logging/analysis/reliability teams have it much better at Google, in terms of work-life balance, but the tradeoff is that it's harder to justify your impact when it comes to promotion time.
I have however, on more than one occasion, found myself up far too late (or in the pre-pandemic times having nearly missed the last bus home) because I just want to figure out what is causing this damn bug. It could wait until tomorrow, no one would care if I waited until tomorrow, there is no pressure for me to fix it today. But I want to solve the problem.
No one is demanding I do that though. They’d probably think I’m crazy tbh
The number of times I stepped away from a problem after hammering at it for a couple of hours, took a break, got some sleep, and came back to it and solved it in < 30 minutes is...solidly in the double digits by this point.
You may find yourself better served forcing yourself to step away; you may find you get an answer with less work, and take better care of yourself.
Choosing a startup with this kind of potential is insanely hard to do, and if you get lucky then the explosive growth of immediately becoming wealthy is what redeems it. But the key is choosing the needle in the haystack. It's harder than being an investor. An investor can make 100 bets hoping one works out, but an employee is only deciding on 1 place.
Working at a FAANGM company is a safer chance at hoping to climb the corporate ladder and reach a cushiony role through steady work over time. Essentially someone is hoping to ride a steady incline up from $150k to $300k+. Granted it's not the exciting casino-like feeling that a startup exit provides.
The average SWE working at a series B to series E startup is nowhere close to that. Even if the company exits successfully, it's after a few more years, further dilutions, and you might, MIGHT walk away with a million or two...which you have to amortize over the years you worked there.
Am I missing something?
No idea what engineers were making, but probably much more than 2x a support agent.
That's a big presumption. There were 407 IPOs in the US in 2020. That's not in tech, but in all industries. If you're pinning your hopes of 50% of your comp coming from an IPO event then you must be very happy with risk.
How many L8's does Google have? 100? The chances to get there are probably resemble or are even worse than startups from Series B to Exit.
I can't believe this paragraph was written with a dismissive negative tone
There is no way the startup you have been working for will keep your interest a priority, and you never know if your share will reach zero in the process of multi-stage VC rounds.
Unless you're the founders who will always be at the negotiation table for new rounds, I saw no point to work for startups, not at all.
If you're in the first 5 years of your career you'll have more opportunity to learn more technologies at a small startup where everyone has to do everything than at a FAANG (especially compared to Google where you will only learn the Google internal stack).
You can leverage that into a much higher paying job in a way that you wouldn't be able to leverage experience at a mid-level company.
The opposite can be true, when IC's at startups who have not truly learned their craft jump to management too early.
I worked at a blue chip and we hired young devs with 2 years experience at major banks and they were clueless. I don't think they actually did anything. Worse, they didn't realize that they didn't know how to do anything. It was bizarre.
That said, it makes it hard to work in a normal corp, you have to find a special place to work where at least the pace is 'just right' i.e. you get to actually do thing, but they're not going to push you into the ground with too much work and stress.
Three people I know how graduated college recently working at big companies have senior engineers dedicating multiple hours a week to mentorship and a lot of learning opportunities. They're growing much faster than junior engineers thrown into the deep end IMO.
The faster title advancement doesn't mean much IMO. Working at a big company I can say that outside of a certain group of other big companies we just don't trust titles to have any correlation to abilities.
Assuming series a engineering role, .30 - .50%, even after dilution, for an IPO'd company, we're assuming 1BN+, to walk away with a "few thousands" is hard to calculate.
A few hundred thousands is more likely (taxes) and even that isn't a worthwhile trade-off for most folks. It'd need to be in the millions to make it more attractive than big tech at the moment.
Some more question you might want to ask: - is there a double trigger clause? (If not then the founder can restart your vesting after an acquisition and do other nasty things.)
- can I exercise my options after beating while I’m at the company. (You’ll be surprised but I’ve seen companies that don’t allow you to exercise while you’re employed there which means you can kiss qsbs goodbye and you can’t leave comoany if it gets too big else you’ll lose the options)
- can I sell my exercised stock on the secondary market? (Some companies don’t allow this)
95% of people don’t ask these questions and can get screwed.
The article says "Equity will be your largest driver of compensation at a startup." as the rationalization of why it focuses on that.
Based on my past experiences, I would say that the learning, network, and reputational effects resulted in far more wealth to me over the medium-term than any incremental change in equity or salary.
That said, in my estimation people go to startups to do interesting things, not for the money per se. BigCo (even a FAANG) is a depressing, high politics, low productivity morass, and a lot of people (myself included) find it difficult to tolerate it for long, in spite of the higher paycheck.
As to running the numbers, there's an excellent essay by @luu that you need to read: https://danluu.com/startup-tradeoffs/
Series B seems to be the sweet spot to me if you would like to avoid working at a FAANG but want similar EV in your comp package, assuming you are decently good at guessing winners.
At that point the company is meaningfully de-risked but the equity offers are still pretty good for mid-career folks that you end up with millions in a good exit.
For me, post Series A is the sweet spot when there are exciting problems to solve and you still have good leeway to make things happen without too much red tape.
> Even though reporting QSBS is simple, you should still keep financial statements and other supporting documents to support your claim. Detailed balance sheets for the company from its incorporation through the close of your investment will show if it has more than $50 million in aggregate gross assets. Equity documents (type, date, etc.) are also important to demonstrate that your investment qualifies. [1]
One of those three can send over a letter to the CEO or CFO to share relevant information. It’s usually already prepared for equity or debt financing rounds and possibly periodic reporting.
Ok so my understanding is you need to exercise your options and wait 5 years for QSBS to kick in. After that you can start selling at $0 in capital gains.
Just a heads up though, this tax treatment may get closed soon with upcoming federal legislation. May not apply to shares exercised prior to the legislation being enacted though.
Note: here are some people who talk about QSBS as well https://www.mossadams.com/articles/2021/04/qualified-small-b...
Here's why. Yes, there are potential tax advantages; you avoid having to deal with AMT, which is significant. But the tradeoff is that you've thrown away the essential advantage that an option gives you: the ability to travel back in time and purchase stock with perfect knowledge of what it will do in the future. Why on earth would you give that up? An option lets you wait years with zero risk and then decide whether you should've invested before that time went by. That is a superpower.
You might be thinking, well, I feel really bullish about this company, so I'm going to go ahead and early exercise. But here's the thing: most startups fail. It is extremely unlikely that your options will be worth anything in the future. So unless you're an unnaturally talented investor—and you aren't, you're a worker bee—you won't be able to beat those odds. And the great thing is, you don't have to—because you have options, the whole point of which is to eliminate risk.
Don't throw away your time machine.
It really depends on the health of the company, risk tolerance, how long you plan to stay, and your strike price.
Paying a few thousand to exercise early to avoid hundreds of thousands in taxes later was worth it for me.
Don't rush into it obviously, take a few weeks/months inside to get a feel for financials, the business/team etc, but early exercise if you can afford it.
Early exercising may risk tens to low hundreds of thousands of dollars, but the upside is hundreds of thousands to millions through long term cap gains and/or QSBS tax savings.
It also protects you from losing your options if you leave the company, two years into your tenure you might want to leave, but the strike to fair market value spread might have grown so much that you can't afford it in your post termination exercise window.
As always, super dependent upon your particular deal, your financial position going into it etc, do your own math and risk tolerance, but I wish someone had shown me the numbers before I joined my first startup.
If you're an early employee at one of those startups (with a very low strike price), and know that the company has a strong balance sheet, I would early exercise to lock in the long-term capital gains tax rate.
This is even more true if the startup has novel IP, which could be worth a healthy sum even if the business were to go kaput.
Also, as others have said, if startups weren't lucrative, VC as an asset class wouldn't exist at all. It's rare, but making millions as an early employee is something that definitely happens.
Though if you're an early enough employee to be getting a strike price that you can exercise without any worry (on the order of $x00) then you probably should be getting stock directly vs options anyway.
For a more complete guide, my preferred document these days is the Holloway Guide ( https://www.holloway.com/g/equity-compensation ). Though now I have to add a warning that there's a slightly annoying attempt to get your contact info and it has gotten rather long...
An employer who wants to keep you will demonstrate that by compensating you well and giving you an opportunity to augment your skills.
This offerer sounds like someone who has experienced turnover problems and has decided that it's everyone else's fault.
Refresher grants could also motivate employees to stick around for the long term!
Nonetheless, given YOUR market, you should check whether the other parts of the compensation they are giving you are right. For example, there was the case of Mailchimp a couple of days ago: They gave no stock to their employees. However, in theory their compensation package was good in other ways. So if the company is offering you a good salary + benefits (what about 401k matching? PTO? sick days? gym membership, WFH and whatnot), that will give you the full picture.
If there's a hostile reaction to [3], you just learned something valuable. If there's a neutral reaction, you can say that you're evaluating the CEO's ability to negotiate and persuade, which is true.
Interviews and offer negotiations go both ways.
If they want to keep you motivated for the long term even if value isn't increasing rapidly then they can do bonuses, refreshers, etc.
Run away. This CEO wants to hold your equity hostage.
Run away. Next thing they'll start in on how they're a family.