Hacker News Reader

Comment by TheSkeptic | Hacker News Reader

1. Were your developers granted actual stock, or were they granted options?

2. Your company is angel-backed. If and when it wants or needs to raise additional funds, is the company obligated to protect said developers from dilution?

Assuming that you're a typical angel-backed company, the answers to these questions are "stock options" and "no." Which would mean that:

1. Your developers don't own anything.

2. Your developers don't have an equity interest (or potential equity interest) that they can trust will actually represent a specific percentage interest in ownership if and when their options are exercised.

I don't mean to pick on you, but your comment highlights two things:

1. Just how loosely the word own[ership] is used when it shouldn't be.

2. How percentages are used to inaccurately describe potential equity stakes when those potential equity stakes cannot be reliably translated into percentage-based (potential) ownership interests.

View on HN

While I agree that sacrificing salary for stock is a very risky strategy your comment is overboard and inconsistent.

1. If employees got granted stock they'd have to pay tax on the entire amount which they can't afford. It's not that expensive to buy though since early on, the options are usually granted at a fraction of the actual price though which means they're often 10x cheaper than the going rate. Nobody "owns" their stock until they exercise their options but if they feel it's not worth more than their original option price then the company's flatlining and it's pretty academic anyway.

2. Nobody in the company knows what their percentage will be at the time of exercise. That's regardless of whether they hold options or stock and is part of the territory. Everyone's stake gets diluted when new money comes in just as everyone's value is inflated as the valuation increases. If you propose anti-dilution clauses for employees then someone else will need to double down on dilution and I'm not sure who you propose that should be.

So a) "ownership" comes down to whether someone exercises their options - their call but they have the legal right. b) If you don't like % equity descriptions (which will almost always go down), translate into $ descriptions instead. "If we exit today you'll get this many $, if we exit at 5x you'll get this many $ and if we have to do a downround you could be diluted to this many $. Such change is not unreasonable it's just the nature of it.

I think you miss the entire point of my comment. I am not suggesting that companies describe equity stakes in percentage or "you would make $x" terms (they can do neither), or that they provide anti-dilution protection to rank-and-file employees (it isn't going to happen). And while your assumption that nobody can afford to pay the tax on restricted stock grants is simply wrong, that's a different discussion.

Here's the bottom line: at a venture backed company, you will almost never know what your equity represents - in percentage or dollar amounts - until there's a liquidity event. As such, the value of the equity component of a compensation package should not be overestimated if you're a rank and file employee at a venture backed company. It should be treated like a lottery ticket because that's what it is.

Reply on news.ycombinator.com