If founders treated investors the way they treat employees
software.rajivprab.com
software.rajivprab.com
A reminder that the 90-day window is a requirement by law in order for options to qualify as Incentive Stock Options, and receive favorable tax treatment for employees [1].
If you want to do 10-yr exercise, that's fine, but until the law is changed those will be NSOs and not receive that special tax treatment and will be taxed on exercise instead of on sale.
[1] https://www.cooleygo.com/isos-v-nsos-whats-the-difference/
An increasing number of startups issue their grants such that they qualify as ISOs if exercised within the 90-day window but automatically convert to NSOs 90 days after departure (with the actual exercise deadline dependent on employee tenure), so that the employee and their tax advisors at time of departure get to decide how to handle the tradeoff of more time for reflection vs better tax treatment.
What's more, if an employee gets more than $100k of exercisable options in a year - very possible especially in cases where early exercise is allowed - only $100k of those are treated as ISOs. There's no way in which the tax law privileges a short post-termination exercise period for the excess above $100k.
Last, some companies use the same options plan both inside the US and outside, including my two most recent employers. Most employees working outside the US, with some exceptions like US citizens and green card holders, wouldn't have to care about this US tax law nuance.
We have one of the big name corporate law firms that most VC-backed startups use, and when I asked about this kind of setup they hadn't heard of it before. Path of least resistance was to just do a regular ISO, especially since early team members are usually experienced startup people like us that are used to ISOs anyways.
Would love to revisit it in the future and see if we can enact this sort of plan, although in our case since we're in the web3 space, the equity might not matter as much as the tokens (which don't get favorable treatment either way atm).
I can imagine a new hell where my bonus is paid in Foo tokens but it isn’t liquid and then I have a massive tax liability as the crypto market tanks.
> The second way to handle it - no companies do this, which is why I actually really like this post that he wrote - is you can say up front, " Look you are guaranteed to get your salary but for your stock to be meaningful, these are the things that have to happened. You have to have vested. Two, you have to stay until we get to an exit. Untile the company makes it. You've got other money." Finally, the company actually has to be worth something. Because 10 percent of nothing is nothing. The reason we set the policy this way is we really value people who stay. So don't join this company if you are going to join another one in 18 months because you're going to get screwed. Our policy guarantees you're going to get screwed.
https://genius.com/B-horowitz-lecture-15-how-to-manage-annot...
> A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value.
I'm a founder. If someone works with me for three years then has to move on, they've earned their equity. I want them to keep it and root for us from the sidelines. It's sweat equity, not "stay until a liquidity event" equity. Especially with founders themselves starting to more aggressively take money off the table using secondaries (which aren't always offered to their employees).
As Zach Holman put it, fuck your 90 day exercise window. https://zachholman.com/posts/fuck-your-90-day-exercise-windo...
Also, if you're a founder, note that your lawyers will almost certainly towards 90-day windows (and your investors might too). It might take some work to get something more employee-favorable.
No thanks. But it was eye opening.
But it’s for sure going to be in the book I plan to write about the valley.
I know some VCs have dilution/ownership thresholds and they might have been trying to find a way to get in on your raise without bending their own rules. But it is really offensive to your employees, I know if my company did that I would walk.
Typical account thinking.
Pro tip: stay away from VCs run by accountants or lawyers, always go for the ones run by entrepreneurs.
They were big investors in a few very high flying super flops in the 2010s. It has always made me wonder if the employees at those companies would have been screwed had the companies been everything the tech press ckaimed they were.
That is, can't I make the same argument about being paid at all above the legal minimum? "Taking a higher-than-minimum salary is really a direct wealth transfer from the employees who choose to remain at the company to former employees who are no longer contributing to building the business/its ultimate value."
The logic being that if a current employee takes a higher salary, then that reduces the valuation of the current (and future) company, which is a wealth transfer from future employees (who own some small share) to the current employee who may leave? From this argument a16z's position seems absurd...
So it's a direct wealth transfer from people who have earned something, to institutional shareholders, most of whom are investors.
It's odd because Ben seems like a nice guy.
This reminds me of a kind of Thiel/Musk/Bezos ego thing, where otherwise rational and reasonable people do these couple of things where they delude themselves into the rationality of their decisions. But that 'character flaw' is actually a competitive advantage for an otherwise reasonable person.
That is, you can exercise your options whenever you want, even your first day at your job. What happens is the company can buy them back when you leave, but that ability goes away by the same amount as the regular vesting schedule. So if you leave the company after two years the company buys back half your stock, but there’s no tax impact (and by then you’re in the LTCG regime). Big win, easy to do, so why doesn’t everybody do this?
The point is that whenever you leave you have the same number of shares either way, but this way you pay for them at par (and with 83(b) owe no tax until you sell) and get the LTCG clock started right away. If you pay when you leave you have to pay tax on the delta
This is much friendlier to the the employee, at least when the purchase price is quite low. And why wouldn't I want that for my team?
I've done this with half a dozen companies at least; I don't know why everyone doesn't. The change to the option plan is quite standard and the law firms all know it.
There are many reasonable ways to deal with it, including “right of first refusal”, some kind of custodian/escrow, FMV+x% forced sale that can be called by the company, allowing only substantial sale to 3rd party (or an employee with 2000 shares could sell one share each to 2000 different people, and all of a sudden you get regulated as a public company) etc.
I am all in favor of sharing ownership with those who shared the risk and the burden, but the governing laws weren’t written weren’t written for this, so it needs to be taken account in the specific agreements.
>I am all in favor of sharing ownership with those who shared the risk and the burden, but the governing laws weren’t written weren’t written for this, so it needs to be taken account in the specific agreements.
These issues almost never happen and the process for giving employees equity interest is well developed. The standard SPAs always have ROFO clauses and such. There's no need to innovate -- any Vally law firm's standard docs have everything needed.
In the US shareholders of private companies have pretty limited inspection rights: basically public filings and board minutes etc (usually the latter say things like "the CEO presented the last quarter's performance and a discussion ensued"). Preferred investors negotiate more detailed inspection rights.
In 30+ years of running startups in the Bay Area I have never seen any of the things you describe happen (not just my own companies -- never seen them happen). OTOH, at the second company sold (first one I founded) the front desk receptionist made enough to pay off her mortgage and fully fund her retirement. That's the way things should work.
Spend your energy on the upside.
But it could also have been used by a single vengeful employee to effectively stop or delay that restructuring, which would have been bad for everyone.
All I said was that there was nuance. A good lawyer in the relevant jurisdiction would know what it is.
Just a guess, the directors of the company might prefer, from a fiduciary point of view, to invest the cash in capex or sales, rather than re-acquiring options for the option pool.
Although, if you're acquiring at cost of exercise, the stock is probably more valuable than the cash you're paying for it. I could argue it either way, curious how you've valued the opportunity cost?
If your company doesn't have a significant sales+marketing department that can always seem to justify soaking up excess capital in exchange for marginal growth, your technique seems like a no-brainer! Smart idea.
RSUs seem to make sense to public companies which don't meaningfully have access to all the kinds of compensation available to private companies.
IANAL but RSUs seem like a ripoff for a private company to use them even if the common price is high compared to a standard ISO SOP.
The standard should be 83(b) elections supported with the company covering cash to exercise (or at least some portion). That makes the equity closer to RSUs, which is more aligned with the desired incentive. VCs / investors should be putting more money into companies to make this work; the employee pool is only typically 10% so it’s a tiny haircut to them.
If I understand it, an 83(b) election allows me to buy stock in the company at the (say) day of employment, and recognise that as income on the same day (ie I buy the stock as I join). Then there is some restriction on me selling it during my employment (not quite vesting but similar).
Which sounds sensible - but I may have misunderstood.
Overall it seems either people are trying to make a simple situation seem complex, or the (US?) tax code is set up badly.
http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83...
Here’s the best part - if the company is worth < 50m at the time then you are granted and exercise them, when you sell those stocks one day, you will owe 0 income tax as it’s a “qualified small business stock” - on your first 10m of profit. Wowza’s!
It’s amazing.
The company could however pay for exercising and pay the income tax on that cost. Then it would be interesting.
So yeah: I'll just go with Google I guess /shrug
They ended up making a barely acceptable offer because despite my horrible faux pas, I was a domain expert and they couldn’t keep staff for more than a year. And I accepted because I was 1 month away from being bankrupt and homeless. Lasted a year and a half. The business turned out to be solid but I left for greener pastures.
I have no idea why owners are so cagey about the health of their businesses and funding sources, to potential employees. Especially when things are basically fine! He was bootstrapped and evidently had fine cash flow. Why is this a faux pas to ask? HN is full of entrepreneurs: why are you so offended when a candidate asks about cash flow or to see the cap table?
You see the same behavior in non tech companies when VPs find out what their senior software engineers are paid, and start getting upset at the similar salary level, even though that's the market price. Or in things like rules that only Execs get to fly first class. I had a an executive have HR look into me "breaking the rules" when he saw me in first class with him on the way to a company event after I paid to upgrade my own seat.
Life is about observing the lizard brain rules.
Never be the bearer of bad news for example, because even if people are polite about it, the lizard brain says stab the bearer of bad news.
- The other common reason is those numbers are confidential not just from employees, a competitor or investor who is evaluating a competitor could use it against you, so founders worry about that stuff, you may not take the offer and mention it to next company you talk to etc.
- Few tech employees have the financial know-how to read financials, especially of startups . Most early stage investors rarely go through the actual books in any detail.
- Measures like churn, CAC, ARR, MRR are the go-to metrics . The actual book numbers basis cash flow can be very bad although company is in decent health, this is why banks will not loan early-stage startups money unlike small businesses as startup numbers are not simply good enough by traditional metrics.
- In small enough companies exposing the books to new employee will give rough idea of who is earning how much including the founders, and what else company is spending money on, keeping the information asymmetry can be seen as beneficial by founders.
So as a startup founder, unless you are ONLY looking for financially illiterate employees who are willing to get snowed, you need to show and tell.
Often I think the employer doesn't realise that me, the software engineer, might not have the financial know how.
But my buddy from college with a masters in finance, THEY do. I'm running the numbers past them.
the upside will be low unless you join very early stage and get decent amount of equity or join as a founding engineer or the company you join becomes valued at 10s of billions which is of course rare otherwise there is very little upside.
Almost always FANNG level companies will pay you close or better what you would make best case in most startups with much less risk and far better work life balance.
The reasons I have found people are most happy with are non financial, like can’t join big tech/ great dev but poor leet coder, learning opportunities, much more senior role , switch skills, less red tape to get things done, stepping stone to starting your own etc. You can’t quantify that , for some it is worth the risk and the paycuts , for others it isn’t.
Most startup recruiters or founders probably won’t pitch that picture to prospective employees, independent of their ability to pay you economics is going to be favorable in big tech any day compared to most startups .
Startups often have very, very mission critical technical problems.
The first 20 engineers will be solving some really important technical problems. And they'll need high speed & high quality, since what they do will probably directly manifest in the ole bank account.
Even outside of engineering.
A rule of thumb running a startup is you should overpay for your first 30 employees. Get smart people who are future leadership candidates.
If/when you expand to a 500 person company. Out of those 30, chances are quite a few will manage upwards of 30 people as their reports and child reports.
I'm sure there's a million different variations on this story. By no means is it universal.
But the "early employees are solving life or death business problems, and will transition to being leaders and force multipliers of large numbers of new hires" definitely happens.
I don’t know, many startups are solving business problems, tech is sometimes just fancy versions of CRUD apps.
The nature of the business is, employer's rarely ever have to hire an employee who knows how to negotiate, knows when to walk away from a deal, and knows their market price.
Most employees you've ever worked with are not quite that clever.
Most employers vastly prefer employing this slightly dim type of employee, because they cost a lot less money and ask for a much simpler quid pro quo.
I find capitalism extremely exploitative like that. At least with unions you have a hustling union boss advocating for the union employee so employees don't get ripped off too much.
Now it seems like the vast majority of people I work with are tired parents in their 30s and 40s, who are working a job they don't love for not all that much money.
Because they don't have the resources, socioeconomic and otherwise, to bargain and argue their corner.
I am evaluating options now and one of the reasons I am not so keen on offers from startups (even ones with multiple series of funding) is that they expect me to take the risk without sharing adequate information.
Having said that, if risk is a major concern most startups are not the perhapsright place to work. They are designed to fail quickly than become unsuccessful or low growth businesses, employees or founders do get short end of the stick frequently.
Risk appetite for each person is different. For anyone considering a start up an assessment of the degree of risk and rewards is essential. So if a startup does not offer me enough information to make that decision I will pass on the offer.
In my experience, all the good startups are transparent in helping employees evaluate equity offers. Ex. all YC companies I interviewed at were happy to share info on outstanding share count, valuations, and even preferred stock.
Meanwhile other lesser startups (often run by finance types) thought I was insane to even ask.
It's clear which group actually values engineers.
A couple years later, the ship came in, and it was a big payday for the other employees, but not him. He was furious.
I mean - I think it's fully legit for people to have a 'broad sense of the state of the company' - and companies should be prepared to speak to it in some way. But not exactly in the way people are asking.
If financing rounds are public, then at least there's that, and it's possible to 'very crudely guess' where companies are at.
~Every interview process I've gone through required an NDA at some point.
> I mean - I think it's fully legit for people to have a 'broad sense of the state of the company' - and companies should be prepared to speak to it in some way. But not exactly in the way people are asking.
A "sense of how the company is doing" is not anywhere near enough. The company can be doing extremely well and that still doesn't give me any indication what (for example) 10,000 shares are worth.
If a company won't provide at a minimum the percentage your equity grant represents and valuation at last funding round, you should rightfully value stock at $0.
The 'health of the company' and the 'valuation of you shares' are completely different things.
On your last point: "a minimum the percentage your equity grant represents and valuation at last funding round" - yes, they should probably do that. Because otherwise, the value of that equity could be anything, it's impossible to know what 10 000 shares means.
But that doesn't tell you anything about the company. Private valuations are mostly fantasy.
You'll want to get a sense if the company is healthy, and even 'burn rate' isn't so much the right question, it's probably new customers.
If the company is growing in terms of revenues and customers, it's probably the most positive signal of all not only in terms of stability, but also the actual value of the equity in then i.e. 'if it will be worth something'.
Finally, NDA's are not a very good protection, everything is still 'need to know'.
Your position is inconsistent and conceited. If you have actual points, you wouldn't resort to denigrating others.
Especially since you're moving the goal posts, your contribution to this thread is useless. You've swiftly gone from saying employees should scrounge info on funding rounds from the web to admitting employees need to be told info about outstanding equity and valuations.
I hope you're never in a position of hiring for a startup. Anyone with an attitude like yours would chase away quality candidates and only leave clueless rubes behind.
> You'll want to get a sense if the company is healthy, and even 'burn rate' isn't so much the right question, it's probably new customers.
This shows how incredibly uninformed you are. It's easy to acquire many customers by selling $1 for $0.50. It doesn't mean the business is healthy.
I highlight the fact that you did that - which validated my position that 'interviewees won't know specifically what to ask'.
You jumped into the ad hominem.
I have 'hired for startups' in fact several of them, including two Unicorns, and I'm an adviser to others, and I've helped set up a VC fund.
But that's besides the point.
You don't seem to understand the material being presented, but maybe worse, lack the self awareness to recognize that, and possibly have thin skin, all of which are not good attributes for dynamic environments like startups.
I'll help you. For each of these questions, do you think it's something employees should be told:
1. How many shares are outstanding and what preferences are included in the cap table? 2. What was the valuation at last raise and when did that round close? 3. What's the burn rate and remaining runway? 4. What are the 6/12/18 month plans for the company? What are the biggest risks and opportunities currently facing the company?
> You don't seem to understand the material being presented
Again with the ad hominem.
Employees have hearsay and scraps of info that friends are willing to share. Limited information = easy exploit
Found this database of startup comp that sorta evens the playing field: https://topstartups.io/startup-salary-equity-database/
Anything else out there?
The innovation of Silicon Valley isn't anything to do with technology, and hasn't been since the 1990s. Rather, it's the disposable company. If the investors get sick of something existing, they can choose not to fund it in the next round, call their friends and tell everyone else not to fund it, and it dies, allowing them to build something new in its place. The advantages (to investors) of the disposable company are legion, but one if them is that it doesn't matter all that much if you pick a scumbag. Which is also why YC backs so many DVFs (domestic violence founders). If they're jerks who get stuff done, you can let them collect a few million before firing them and putting your buddies in executive positions; if they're jerks who don't get stuff done, then you scrap the company and fund some other DVF.
Are you Ryan Breslow?
Curious to hear more about DVFs. Not surprised they exist, but doubt they are the majority?
In my experience, 10 year expiration dates for options and reasonably detailed financials (at the very least, ARR, ARR growth rate, churn rate) have been table stakes. And most companies were happy to let me view their latest round's pitch deck, after signing an NDA.
It's frustrating that almost no company offers early exercise rights, given how significant a tax value that it can represent, but compared to most other industries, it does seem tech is particularly employee friendly.
If potential investors are seeing that deck without an NDA, why should you sign one?
What even Marx didn't foresee was the effectiveness with which managerial bureaucrats (who might have been considered upper proletarian in the 1800s) would take the system over for their own purposes and merge into--and, arguably, become--the real elite... the same thing that happened in certain failed socialist experiments.
If you're born into connections, you make more connections. If you're stuck having to work to survive, you get assigned more drudgery and never advance. It's the same shitty system that's been around for thousands of years.
Your bargaining chips are determined by supply and demand. If you have stuff - money, knowledge, skill, power by virtue of organizational position - you have leverage. If you don't, you don't. Eliminating social class doesn't change this much.
The people with connections and serious money do not meaningfully compete against their own class (at least, they ensure that their intra-group competition does not benefit anyone outside their group). The people with skills, knowledge, and work ethic have to compete against the whole world.
It is not a symmetric or fair exchange.
But within capitalists there is also always the noveau riche and the old money.
You have to be self aware of that dynamic. Because playing off old money vs noveau riche is as essential tool of the proletariat.
If these weren't social classes then you wouldn't see resistance to changing the formula in the face of market pressures and you would see easy movement between investors and engineers instead of them being gatekept along connections and rituals.
At a minimum, you are going to interview a lot more engineers that are tempted to divulge trade secrets than investors.
There's a huge difference between pitching and due diligence.
Also, it's reasonably common to show a pitch deck to 100+ potential investors. How many series A companies interview 20 engineers, let alone 100?
But yes, the hypocrisy is real. Employees get screwed big-time by lack of information and 90-day exercise window: https://www.productlessons.xyz/article/how-stock-options-for...
Important thing is that the message continues to get out there, and more people know to ask the right questions.
I'm not an expert but my understanding is that everyone should be pushing for this or for options to be way cheaper to purchase when you leave.
Without one of those two options the safest thing to do to not waste vesting time is join a public company or a late stage startup. Late stage startup you're more likely to be acquired or IPO while you're there and you don't purchase options out of pocket.
Early stage startups are where you're least likely to stay the 7-12 years required for the exit event to take place and thus most likely to leave vested options on the table when you leave the company because you don't have cash and/or don't want to risk that cash.
Yes, you have to come up with the cash to buy the stock at 83(b) time, but if it's early, that's pocket change.
That said, the strike price for common should still be reasonable at Series A - not $0.0001, but not $10 either, so 5-10k options can be around $10k. (Yes, a company can raise at $100M valuation even though the 10M common have a strike price of $1. The $100M is preferred.)
And, there's no law saying that 803(b) is all or nothing.
But obviously, much better cashflow-wise
You aren't taxed when options vest because there was no gain. Only when you exercise options, and you will be taxed on the gain. So if you make more money, sure your tax will be higher.
RSUs are taxed at vest as that's a gain.
Your vesting gives you the right to purchase more shares.
If you do not purchase those shares, there was no gain, so there was no tax.
RSUs are taxed at vest time even if you hold the shares, presumably because they can be sold immediately since they have some FMV.
Options are not taxed at vest time, even if they are ITM and have some large positive FMV. And for ISOs, even if you exercise immediately at vest and you don't sell the exercised shares, there is no tax (assuming no AMT).
What is the reason for the different tax treatment?
You originally said:
> options being cheaper to purchase means a larger tax bill when you vest them
The operative word here is vest. No tax on vest.
I think you are trying to say "if you join a startup and get dirt cheap options, when you exercise them at a later date and they are worth something then, your tax bill will be larger than if you got more expensive options and exercise them. Yes, this is true.
- strike price: $0.01 FMV at exercise: $20 - strike price: $15.00 FMV at exercise: $20
You have a larger gain in the first, so sure, you will pay more tax. Is this what you are trying to say?
I can go online right now and buy options in Uber (or any other publicly traded company). Options clearly have some value.
Options in a private company with a strike price of FMV have essentially no value, and have no taxes.
Options in a private company with a strike price of $0.01 and a FMV (per share) of $20.00 are worth at least $19.99.
Therefore, options with a very low strike price should create a taxable event when they vest, whereas options with a FMV strike price would create a taxable event of $0 when they vest.
So a very low strike price seems to force employees to pay taxes when they vest.
It's possible I'm wrong (I'm not a tax accountant or attorney), but I would like the problem in my logic pointed out.
If you buy an option right now in uber, you will not be taxed until you exercise that option (I'm 99% sure of this -- I don't trade options, but also I think you can buy/sell options contracts themselves, and I don't know the tax implications of that) You will either have a capital gain, or a capital loss. An option is the right to buy/sell a stock at a price. You don't get taxed until the moment you actually buy/sell the asset.
When you are given options in a startup they work the same way, it's just a contract, you will have no tax implications until you actually receive something of value, by exercising the right to purchase the stock.
> So a very low strike price seems to force employees to pay taxes when they vest.
People don't pay taxes when the options vest, because that's just a part of a contract. People pay taxes when they exercise the right to purchase those options which converts them into shares. If your equity is worth 100,000 FMV and your strike price for those options equals 10k and you do nothing, you have no tax. If you execute that contract, you pay 10k, get 100k worth of stock, and have a 90k gain. That's what you are taxed on.
This is what forces people in startups to pay taxes and the dangerous part is you might pay taxes and never get a chance to sell the stock.
I'll share two examples:
- I've exercised options where the strike price == FMV, and paid no tax. But the operative word you keep mixing up is vesting and exercising.
- I also currently have options that are vesting in 10 days, and I will not pay tax until I exercise them.
RSUs are different, because they are literally actually stock, it's not a contract to buy stock, so you are given an asset, and you are taxed appropriately for it as you had a capital gain. (The same as the second half of an options contract, you get stock, you are taxed on the value that you get)
Does this help to clarify?
This is true (or sell the option). This is just like stock, in that it only gets taxed when it pays off, either by a dividend, buyback or sale. Only in this case, it's when it gets executed or sold. (Although I think if you execute and hold the stock, it just somehow adds to the basis.)
> People don't pay taxes when the options vest, because that's just a part of a contract
I agree that ATM options have this. My contention is that ITM options (ones with a strike price less than FMV) would require taxes. I could easily be wrong, but my assumption would be since options have a FMV themselves (just like shares of stock), they would be income in and of themselves.
Maybe I'm incorrect in that reasoning, but I don't understand why. An option to buy a share of Uber is currently ~31.68. An option to buy a share of Uber for $20 is ~11.90. Therefore, if you buy that option and sell it later for 12.00, you'd have a short term capital gain of 0.10. If I give you an option, I'm giving you a gift of $11.90.
My confusion is how can a company give you, say 100,000 options, which could have a market value in the millions and you don't pay tax on them.
I have to assume that if someone was granted a million dollars worth of gains in one year and the asset was not sellable the tax burden would probably bankrupt most people. (This is the risk of exercising options when the stock is not yet liquid anyway, "phantom tax").
The really sickening thing is that most acquisitions (since that's the likely route for these companys, if they succeed at all) involve the common stock getting wiped out while the executives get "management incentive plans" in new stock. They still get screwed if they leave the acquirer (since their vesting clocks usually reset) but they at least have a shot at getting something.
FAANG RSUs might potentially be another exception.
But it seems like early stage startup options are an absolutely minefields for employees. I've seen instances where it was setup so regardless of how the company performed, people in the first 10 employees would have walked away with nothing in an exit.
And that's before talking about Cliffs. Even if every other thing falls into place, you can just get fired on day 355 if a founder decides they'd prefer to hold more equity.
FAANG RSUs are free money.
Generally, equity on its own does not require agreements like this. Accepting a job offer does.
I don't think it's helpful to think of equity as having an opportunity cost. It makes it sound like taking equity, everything else being equal, could make you worse off. It won't.
(Excepting externalities like taxes which are variable between jurisdictions.)
You lost me there. How does taking a salary imply that you’re foregoing a salary? That sentence doesn’t make sense.
You seem to be conflating the expected value of equity with the general financial outcome of having a job, or you might not know precisely what expected value means. (That’s okay! I’m not judging.) You can’t say that equity is positive EV just because you didn’t lose money and ended up with some salary. To calculate EV, you must compare it to what happens when you don’t take equity. That is the definition of Expected Value: the probability of an event multiplied by the outcome gain/loss. Since accepting lower salary has a probability of 100%, and the probability of the value of shares being greater than $0 has a probability less than 100%, it is obvious and tautological that the EV of some equity can be negative.
If I take a half salary, and a bunch of equity to compensate for the low salary, and the company never goes public, then it’s a negative outcome, I lose 50% of the money compared to taking a full salary with no equity. (Even if I collected, say, $1M in salary in the mean time.) This is what actually happens all the time, equity ends up worth less than the value that it was traded for. Given that most startups fail and never go public, that means that the average EV of equity over all startups probably is negative.
That would be logical and a reasonable assumption, but that’s not what the term “expected value” actually means. The term has a specific mathematical meaning in statistics that is very different from the calculation of what your options are worth. EV specifically means that you take the outcome of all possibilities, and you weight them by the probability of each possibility. This is why I was insisting that you need to account for the case where you take a larger salary and no equity, because that is the other major possibility, and it’s what you trade away when you take equity as part of a startup compensation package. This is what the term “opportunity cost” is referring to, it’s referring to the path you didn’t take.
So, I (perhaps) see what you were trying to say, and I agree with you insofar as equity won’t cost you actual cash once you have it. But it can and does cost you money that you could have had, if you took a different path. It’s important to understand what “expected value” and “opportunity cost” mean before you choose to take the equity. Once you have the equity, it’s too late and you’ve already paid the opportunity cost, now you have to hope the equity becomes valuable enough to exceed all the salary you traded it for.
I work in a start-up because I got tired of corporate BS and middle managers that produce nothing in the best case and hinder progress of my work in the not so good ones.
Perhaps I'm unlucky but I've worked for enough startups where that sadly still existed. I feel like there's some point in the growth trajectory where inevitably those folks show up. Sometimes they even bring others from their former corporate cabal to help with those things.
In any case working for a paycheck is different compared to investing for a possible payday.
I'll keep my investments separate to my work, thank you.
Know your vested dates and step on it.