A Newbie’s Guide to Startup Compensation (or “Stock Options will Make Me Rich”) | Hacker News Reader

A Newbie’s Guide to Startup Compensation (or “Stock Options will Make Me Rich”)

tonywright.com

77 pointsdshah42 comments

Excellent write up!

One point I would add: Options do expire, and at least where I work, the expiration is tied to when you leave the company. So, if I quit, I have 60 days to exercise my (vested) options. In plain terms, that means I have 60 days to buy the stock at strike price set in the options agreement. Until I read the agreement, I didn't realize that to make use of the stock options, I would have to spend my own money to buy the stock.

I suppose this is obvious to anyone in the know, but for a first-timer like me, it took a little time to wrap my mind around. I just thought stock options were like coupons I could turn in for gold coins or something :)

Yeah, you technically need money to buy options, but in most cases you're buying the stock only to immediately sell it again at its current (higher) value. If there's no buyer for your stock you can probably safely let them go, since the market (private as it may be) has determined they're worth nothing.

Not so fast. You also buy stock options when you quit the company, but want to keep the equity you worked 4 years to vest into. Many options plans will require you to buy them within 30-60 days of leaving the company.

For obvious reasons, the majority of options purchase scenarios could fall into this bucket, and not the "sure thing" of selling your in-the-money liquid options after an acquisition.

Another caveat about this is that there are plenty of horror stories about what happened to people with startup common shares that left their company before acquisition. You are, as you probably know if you're been reading here for awhile, last in line in a liquidity event.

It is actually much worst than that. If you exercise your options while your company is still privately held, then you have no way to sell the shares which means that any gain is only a paper gain and should not be considered a taxable event. This is true until you recalculate your tax return using AMT which you are required to do by law. Currently AMT considers paper gain from options a TAXABLE event!!!! So if you are an employee and you decided to leave the company or if you are fired. You are between a rock and a hard place. You either walk away from the options. Or you have to come up with both the money to exercise the options and the money to pay the tax. And if the company tanks after you are gone, then tough cookie. You can only write off the loss $3K per year, one year at a time. On the other hand, if you are a Founder or co-Founder, you get to own shares and not options. Then not only do you not have to worry about exercising, but the clock starts right away for capital gain. And if you sell the company in five years, since these are 1244 stock, only half of the gain is subject to federal tax. The last part of the article is actually the most important. Think about the founders of Youtube. They were employees of Paypal and did not make a lot of money when it was acquired by eBay. But they gained experience, credibility, friendship, connection and just enough money to bootstrap their own idea. It worked out well for them in spite of the inherent pitfalls of owning options.

This is why I would never be an employee with a measly .5% unless: a. I wasn't ready to do my own startup or 2. I _really_ thought the company could be the next Google.

I do think this part is a bit wrong: "If you’re getting paid market value, then… Well, there’s no risk– and you shouldn’t be expecting much reward."

I don't think that's the right way to look at it. Working for a startup at your market rate is not the equivalent risk to working at an established company at your market rate. The floor can fall out at any point for almost any reason.

Also, a really great hacker doesn't have to settle for market rate salary alone. He could be at some other startup that's very early stage or simply values him highly enough to pay a market salary and give him a generous equity allotment.

If you remove the Google's of the world, most folks that will make FU money from a startup are the investors, founders, a handful of early employees (maybe), and some senior VP level folks.

I disagree on one point: I don't think startups are that much more risky than more "established" companies these days.

Established companies seem to fail or downsize reasonably frequently these days. The real question is if/when this happens, is it easier/harder to find the next opportunity if you've been a career "big enterprise" kind of person or have been working for startups?

You are right on the perception of risk, it doesn't matter if it's a startup or a bigco. The difference is you are working 60+ hours at a starup whereas you are working 20 hours of actual work if you are lucky at a bigco.

The 5-year failure rate of new businesses isn't the infamous 80 or 90 percent. It's about 55%. A big company job where there's a 45% chance that it will still be worth coming to work in 5 years would be considered very good.

Well, of course, standard venture model option grant percentages do not make sense in case of a small exit ($50M) which takes 4 years. They are designed for an exit of 5 to 10 times the size. So, if you are setting up an options pool, you should account for target exit size and time. Incidentally, the interests of full salary employees with stock options are much more closely aligned with those of VCs than founders.

In Silicon Valley as an experienced engineer working for a startup you should be getting about $150k/year + stock options. Some startups will have good exits. Expected total return per year is about $300k/year long term. But you are forced to save 1/2 of your compensation, and get tax advantages -- both good. And you get to play the become-really-rich-on-stock-options lottery. If you are hiring engineers here the packages should somehow be competitive with that.

At 150k/yr, to make 600k in a liquidity event, you would need to be holding .5% of a company that sold for $115MM --- or about 5.5 times as much as Flickr. In what valley job do you get a full half point of the company for a 150k dev job? How many companies have sold over the past 5 years for more than $100MM?

http://startup.partnerup.com/2008/01/02/2007-acquisitions-we...

More in 2007 than I woulda guessed, but still... I think your points are dead on.

150k seems awful rich for a startup job. Job boards seem to agree: http://www.indeed.com/q-python-l-ca-jobs.html (check the pay box out on the left)

I really meant good experienced engineer. Such a person is worth much more than $150k/year, but you can't get much more cash as an employee in a startup (for good reasons). Also, at that level you are getting at least 10% target bonus, and that's included in the number.

Really, really, really good engineers with keyword-compliant resumes walk in the door on Wall Street at 175k. I'm having a hard time with your numbers.

Sure, but what does that have to do with SV startups?

Valley engineers make less than Wall Street engineers --- COLA and scarcity.

(Sorry, you asked.)

Cash compensation, yes. Total compensation -- I am arguing otherwise. SV engineers are asked to take more risk, and perhaps to sacrifice quality of life more. Thus higher expected compensation. That $175k in NY is probably $200k after bonus, so it makes sense that SV would be more.

Another way to look at it is that new grad is now close to $100k. The experienced guy is easily 10 times more productive. But only gets 1.5 in salary. So, he also gets 5-10 times as much equity, and that's valued because historically it made good money.

New grad is making almost $100k? WHOA!

How bad is the working environment on the valley?

$100k?? Are you speaking from direct experience, because none of the companies in the valley I know pay anywhere close to that.

Engineers do not make $150K a year at a startup. If you happen to run across this rare event, take the job, live on $40K and bank the rest (i.e. don't buy a BMW). Then, 6-18 months later when the company goes down in flames, you will have more than enough money to start your own company.

If you aren't a founder, the best job to get at a startup is some sort of "VP" role after the series A round. These guys DO get paid $150-$175K a year, get the same number of options as the early stage engineers, and don't have to do as much work. As far as I can tell, their only role is to go to meetings with each other. That said, the mere existence of these employees signals almost certain doom for the startup.

My apologies to the YC founders looking for employees, but being an early stage engineer (not a founder) at a startup is for suckers. You get paid paid $10-$50K less than you could at a big company, and your options are going to be worthless or worth far less than you could ever imagine. If you have an entrepreneurial bent, your best bet is to take the higher salary somewhere else and save money until you start your own thing.

This is true if your business plan is a Hail Mary pass for an acquisition by Google, Microsoft, or IBM. That's because the goals of the founders and the goals of the employees aren't aligned; it's broken in the same kind of way as Freakonomics says real estate agents are.

I hope it's not true for startups that aren't drugged out on VC money. I don't know whether it is or it isn't. I can't tell, because I'm one of 3 founders, and the company is pretty much going to do what we want it to.

Everyone says "yeah, but the work is better at a startup". I actually don't know if that's true --- I've been through a lot of startup bitch work (and wiring up yet another web form to MySQL is exactly that), and I've been tempted by some pretty awesome BigCo roles. Our work here is pretty awesome (for instance, we've got people paid to hack on gnuradio), but maybe you can get that same work at Motorola.

This is a huge question and I don't have a good answer for it and I'm glad you brought it up. Outside the get-rich-quick schemes, what can we offer employees of real and lasting value? For a lot of us, it's training and reputation; but I want to keep the talent we're developing.

"My apologies to the YC founders looking for employees, but being an early stage engineer (not a founder) at a startup is for suckers."

This is a pretty broad statement that I'd disagree with.

First of all, plenty of startups pay market rate (or close enough to it).

Second (and way more important) most BigCo jobs are woefully bad at preparing you to spin up your own thing. Don't believe me? Come to Seattle sometime and watch how fast all of the Ex-Microsoft entrepreneurs hire "program managers" and VPs. Working in a small startup can teach you a lot about what works (and what doesn't) on a small team with limited resources.

Third, it gets you into the game. You meet other folks who like startups who can be useful later (from co-founders to future hires to investors).

Tony, many of the YC aspirants posting here have zero experience in BigCo's or anywhere else --- but we all still buy the idea that they can start a company. I've worked with ex-Microsofties, and I know what you're talking about, but I disagree with the idea that a BigCo job hurts your chances of starting something when the time is right.

I'm talking about really early stage people... the guys brought on for peanuts and options, pre series A.

- Pre series-A, startups can't really pay market rate, unless they have huge angel investment or the founder is rich and financing the thing himself.

- BigCo jobs probably do encourage the entrepreneurs to do things the same way they did at the BigCo. However, in your example the Ex-Microsoft entrepreneurs are hiring program managers and VPs. Thus, they have enough money to pay these sorts of employees. Which means they got rich at Microsoft or their MS resume point convinced investors to give them money.

- Working in a small startup CAN teach you a lot about what works, but the same thing rarely works twice. Note I'm talking about engineers. All the stuff I learned about server scaling in 1998 wasn't as important in 2008.

- It does get you into the game, but so does being employee number 30 with a comfortable post series-A salary and free backrubs.

$115M is still a small exit. A successful VC exit is an IPO or similar size acquisition, meaning $300M+, in many cases quite a bit more. At that level the numbers work out.

Sure, the last 6 years have been tough, but there's been plenty of exits at level. For some of the smaller exits, the earn-outs/retention packages would have also been significant.

A successful VC exit happens once for every 7-10 companies they invest in. That's the model. Adjust your (I think) unrealistic $600k expectation for the risk. Moreover, look at the companies that sold for over $100MM in Tony's list: in how many profitable companies making $35MM/yr does senior engineer #3 or #4 hold a full half point worth of options? The CEO of that company holds 5-6%.

A good engineer has better dealflow than VCs. He can cherry pick companies backed by top VCs, within those he can pick the ones with the best engineering teams, for example.

I didn't mean that you should expect to double the salary for any given job stint. If you consider time horizon of, say 10 years, multiple jobs, 2x salary is quite a reasonable expectation.

If cherry picking worked, VCs wouldn't invest in the "not cherries". Actually, cherry picking does work, but the cherries aren't clear until after all of the big engineer stock grants are gone. VCs get to cut their losses and double-down on their wins. Engineers don't.

Even if engineers averaged as much gain as VCs, the distribution will be different. The typical VC would be close to the average because they get to make 10-20 bets/year while an engineer gets to make <1 bet/year. As a result while the typical engineer would be far below average return. (Yes, a small fraction of the engineers would be ahead, but ...)

I see his last point here:

  He’s buying a work environment that is comparatively bullshit-free. Little bureaucracy, few meetings, flexible work schedule/environment, etc. If you’ve ever had an environment like this, you know how addictive it is and how elusive it is in larger companies.

... as the most important.

...plus 10-12 hour workdays.

Time is part of the investment.

Then the article's numbers are off, and he should have halved the projected salary.

That's where the math comes in. I can't think of a single startup, however, that actually pay half the salary of what a person could earn at BigCo... Mostly because most engineers are savvy enough to know what a rotten deal this is (unless the equity position is dramatically bigger).

...plenty of 'established' companies have developers working 10-12 hour workdays.

...with bonuses, promotion, more holidays, better health benefit (you and your family need this).

I'll agree with everything but promotion.

That's not always true. It depends on the maturity of the startup's product but I don't believe (and RescueTime supports this) you can really expect to see long term productivity gains from employees when you require them to work well over 40 hour weeks.

Pre series-A this usually is the case, but post series-A there can be a lot of bullshit, especially if there is actual or perceived pressure to hire quickly.

Interesting to note that most people I've met will barter over the number of options or compare competing offers by number of options... but rarely does anyone ask how many shares are outstanding.

There are good and bad reasons for this. You really should ask. But there is a common standard for how many shares you should have, so the # shares is normally comparable between different companies. Sometimes you do get this crazy company with 100M shares post round A. That's a bad sign in itself.

Really? What is this "common standard"? I'll agree that there's a range, but the high end is 2-5x the low end, so if you don't know the exact number for different, you can't reasonably compare companies.

VCs always ask and they're constantly evaluating investments. Why do you think that the less-practiced should wing it?

I thought the same thing but was told that in case of an IPO, a starting price of around $10-15 a share is usually looked for.

According to this article (http://www.inc.com/articles/1999/11/15748.html), "investment banks will target an initial offering price of around $15."

If you take this as true, you don't necessarily need to know how many overall shares have been issued. It would all depend on what level of the startup you get in obviously.

Anyone can confirm that this is a usable ball-park number?

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