Employee Equity
avc.com
avc.com
- I personally find the numbers low; there is a glut of startups out there partially due to engineers realizing that they are more than often underpaid in terms of equity.
- Employers and VCs should realize that a hyper-motivated engineer is worth N engineers. Not juts in terms of effort, but engineering quality, reduction in politics/a more meritocratic culture, morale, etc.
- Heavily invested engineers will be retained; recruiting and skill-retention are huge resource consumers.
For those who'd argue, "0.07 percent is generous for someone who just joined, hasn't done anything yet, hasn't taken any risk" let me remind them that the 0.07 is vested over 4 years (as it should be). After 4 years of loyalty and good work, she probably deserves much more than 7 pennies.
I think startup equity is toxic because it's designed to look like real business partnership, and it confuses the naive into thinking they're actual owners, but actually falls into the uncanny valley.
I think it's better to be honest about the employer/employee relationship (in the way that Wall Street is, with its generous profit sharing) than to try to hide with it bullshit. Startup equity: people paid in penny stocks that couldn't be legally sold to them and that they can't possibly evaluate because they aren't even given the social access to understand the relationships (e.g. investors) involved-- because if they had that access, they'd go off and start their own companies.
If you want to do the Cravath model and promote people to real partnership after 7 years, then do that. If you want to be like a hedge fund (which prefers generous cash bonuses over the increasing ownership complexity, and employees usually prefer that too) then do that. But the VC-istan "ownership" culture is (for engineers) a fucking lie. If we (as engineers) are going to own something, it'll be something we build ourselves and it won't happen in VC-istan.
I have no doubt that there are cat-sharing companies trying to deploy single-digit basis points in lieu of 5-figure discounts to salary. In every market, there are abuses.
As someone who hires pretty regularly in SFBA, it is not my perception that the typical candidate in this market is having the wool pulled over their eyes. Salary expectations in the valley are high. We don't do equity comp at all, but when we did, 7+ years ago, it was typically met with a gimlet attitude.
So are most founders (who don't take any real risk, because they benefit from a private welfare network/safety net; otherwise they aren't getting introduced to VCs) and investors. Most founders pay themselves market salaries post-A, and VCs never take a break from their $500k++ per year.
Bootstrapping is a different conversation, but in VC-istan you take more risk as an engineer (who might be fired w/out severance and have his career ruined by a short-tempered 23-year-old founder) than as a founder (who might have to pay himself "only" an engineer salary for a few years).
If it's the latter, I disagree but don't care enough to argue.
If it's the former, nothing you're saying makes any sense. What the owner of the company makes has nothing to do with what you should make. What you should make is a function of the market and nothing else.
To see why, simply think of any well-run firm whose owner inherited the company. By your logic, every employee there should be better compensated than the owner.
If you're here to relitigate all of capitalism, that's fine too; we won't agree, but I also won't waste my time debating.
In Australia, although there's definitely a lot less VC money going around, I believe VC funded founders typically pay something closer to a stipend than an engineering salary. That seems pretty practical to me too - most founders don't need a 150k salary to get by, and you can make a million dollars go a lot further if you choose to pay yourself half that amount.
Huh. I thought that companies with the 23-year-old CTOs (and startups that don't just hire the founder's buddies in general) tend to hire young and inexperienced. Generally speaking, it's considered fair to pay the inexperienced less.
I thought all this talk of "rockstar ninja" was for the inexperienced. I mean, sure, experienced folks do have a tendancy to act like primadonnas, they usually are not proud of it. It's something we all fight.
Note, I'm not insulting the companies that just hire the founder's buddies... those companies tend to be where you see the top talent. That's the thing, it's almost impossible to get good people "cold" if you just hire a recruiter. But if your founder is a mid-career industry notable? they will not only know who is good, but they will be able to attract those good people.
Generally, for me to call you 'experienced' you've got to have 5-10 years of experience. Not just a summer internship.
Don't get me wrong, certainly the internships are valuable. A company is almost always going to choose the kid out of college who has worked at google during the summer over the kid out of college who took summers off. You might even play them into counting month-for-month as experience, but having a summer job while in college is vastly different from having half a decade in the trenches.
Yup. The bay area, in general, is pretty crazy wage-wise. in '07, I think Yahoo was paying it's interns like $24/hr. Now, our housing is crazy, too... you see shared bedrooms going for $1000/person in mountain view.
It's different here. Median per-capita income in Santa Clara is somewhere around $100K/yr.
The thing is, if those kids got an entry level gig at a large corporation, they wouldn't make that much more, but they'd get dramatically better benefits. I mean, you want grants not options - but you can get those, and that's not the half of it.
Also, you have dramatically more stability at a large place, and quite often get severance if you are laid off... something unheard of at a startup, and that is cherished by folks with families.
Edit:
Also note, you said "even at VC funded places" as if VC backed companies paid less. They only pay less, for a person without a lot of experience, in comparison to corporate behemoths. And even then, only if you factor in the better benefits and stability offered by the behemoth.
If you want to find a place that pays less... there is a whole 'shadow IT industry' that pays barely above service wages. On the corporate side, you have places like geeksquad. You also have a lot of small ISPs, like, say, my company. It's a place for people who can't get into a VC-backed startup (or an internship at a large corporation) to get a toehold. People move up from 'shadow IT' to 'real IT' whenever they can. That is the path I took, in fact.
Well, the doubling is going to be harder to do again... it will certainly happen much more slowly. But moving from real it in the flyover to real IT in a big coastal city can give you a giant bump; you can also give management a shot, or try to start your own company. Really, if shadow IT paid $15/hr, and you doubled to $30, yeah, you could double again if you are reasonably good and willing to move to a big, expensive coastal city. $60/hr is downright easy if you are willing to be a contractor and work through a body shop; it requires a bit more skill but is still eminently doable to do as a full-time direct-hire with good benefits.
Note, my experience has been that if you can gain some network and Linux skills, "production IT" as it were, you have a reasonably large advantage over the windows-only folks, at least in terms of pay.
Pay, for SysAdmins, seems to scale more with how expensive the thing you are supporting is than with the actual difficulty of the job, so... keep that in mind
Incomes vary a lot even in the Valley, though; people seem to self-sort. Santa Clara is $89K median as of 2011, Cupertino even higher at $124k. But Mountain View? $54k median income.
I've checked out trailer parks in the area, too... (I'm totally the kind of guy who would live in a mobile home if it was a good deal) but we're talking like $800+ per month for space rent, then you have to buy the mobile home on top of that. Add to that, well, most mobile homes are not particularly mobile, and you have all the problems you expect from owning a building on land you rent. (Note, not lease, rent. Most of the time, they can jack up your rent year over year as much as they like. I have locked-in rackspace for my servers for five years... as far as I can tell, I could not lock in the space rent for more than one.)
But yeah, I would totally have bought into a mobile home park if it had more of a 'condo' ownership model where the land was owned in common.
Now Mountain View, California, that's got a median of $91k, which is maybe more what you expected. Only place in the $50k-median range on the Peninsula seems to be East Palo Alto. Oakland's about the same.
I know from reading your posts over the years that you have been screwed over as an employee, but I wonder if your perspective is skewed by that experience. Realistically, if people want market-clearing salaries there aren't exactly a huge pool of companies that can afford to hire them. You're basically looking at series A by default, and the founders who can grow businesses to that level are quite rare.
It may be that investors/founders can't tell the difference between luck and skill, so that compensation gets unhinged from what is rationally in the long-term interests of the company. But if employees are really that much better at assessing the difference shouldn't their rational choice be working for a riskier business where they can get meaningful equity? Or just starting their own company?
1) Companies generally set aside a certain percentage of their common stock for employee compensation. I imagine much of this is allocated towards C-level hires, and anyone else is getting the scraps. I've also heard (but not confirmed firsthand so take with a grain of salt) that VCs don't like overly large employee stock pools. I have no clue why - VC stock is preferred and employee stock is common so it's not they're offering any competition. It might have something to do with founders getting discouraged by additional dilution, which in turn limits the kinds of deals that founder is willing to participate in.
2) Paying out more cash to engineers makes it more difficult for your company to achieve a positive (or break-even) EBITDA. Negative EBITDA makes you a much less attractive acquisition target unless you're either trendy or have some ungodly large number of "eyeballs" that haven't been monetized yet (They're paying for the upside). An entrepreneur contemplating offering market-clearing salaries could talk themselves out of it by concluding "I can probably just hire the same engineer for less if I just wait longer and work harder at screening" -- effectively trading time to save money. Not always a smart move, but not necessarily a stupid one either.
Again, just speculation.
For #1, the stated reason VCs discourage substantial employee equity is that they don't want the "equity-oriented culture". The real reason is greed in what they perceive as a zero-sum game (but it's not; different policies would create different companies!)
#2 is probably quite accurate. It's sad, though, that paying well confuses Wall Street into thinking a business is ineptly run.
To the extent company boards are parsimonious about equity, it's probably in order to preserve optionality: a new chief operating officer, or a new high-profile engineer to lead a new product team, or a new CEO, all draw significantly from the pool of equity available to employees. Humans are loss averse, so a smaller up-front allocation is preferable to a larger allocation that subsequently has to be diluted down.
If you are joining a consumer company at number #50 that isn't a rocketship, I hope you negotiated your salary well, because there's a vanishingly small chance of the options mattering.
I'm not sure I agree with that 80% figure and, even if, that's because the VCs have so much influence over the reputation of the company. (Indeed, that's why they have so much power over founders. They can turn off unrelated interest, which gives them extortive leverage.) Market manipulation at its finest.
VCs are in the business of using their power over emerging, impossible-to-valuate companies' reputations to make millions for themselves. If Wall Street analysts did that shit, they'd be in jail.
Wow.. that's interesting. Do you have some data to back that up?
The SV150 lists only 25 silicon valley companies that are worth over 10B[1]. Obviously that is incomplete data, but I'd be astonished to learn there are only 30 companies (ie, 25 + 20%) of Silicon Valley companies that have ever had more than 50 employees!
Anecdotally I can think of more than 5 Silicon Valley companies that made it to 50 employees and then failed.
[1] http://www.siliconvalley.com/sv150/ci_23055045/sv150-searcha...
The press estimates Snapchat's current employee count at 30. I think it's probably a bit higher. Imagine you've been in a cave, so you haven't heard that VCs aren't already $1B+ bullish on them. They show you their user numbers and offer you 0.07% to be employee #50. Aren't you stoked? I would be.
But what about formally hot startups that didn't go anywhere. Take Friendster as an example...
If you narrow to startups that have hit, say 50MM active users before employee #50, you might get to 50/50 success rate. If you analyze potential market size, red flags, comparable companies, and talk to three employees to get a sense of the internal workings of the company, it seems pretty reasonable that you can weed out most of the companies who are capped on their potential market, and the engineering or other disasters waiting to happen.
Incidentally, I think friendster didn't hit 50MM actives. The semi-fails of the rocketship class are Zynga and Groupon, both of which still have market caps logarithmically closer to 10B than $500MM. Foursquare might be both a rocketship and a fail, but I'm not quite sure. Who else grew like mad in the last decade?
I guess my core point is that you can tell really, really early whether something has very strong network effects, and if it does, the arbitrage is currently very easy.
Equity is supposed to match your multiplicative effect on the "fair value" (which is, of course, theoretical on account of being hard to evaluate) of the company (at small sizes, almost everyone is multiplicative-- or divisive). If I'm only going to add 0.07% to a 30-person company, then I'm not going to be challenged. I'm too big a gun for piddling targets.
Now, money is not the most important component as the cost of starting companies continues to drop. Founders and engineers have become more valuable than they used to be in the ecosystem. In some companies, especially newer ones that required fewer people to get to solid traction, this is already being reflected in the cap table. In time, I predict we will move to a new normal where employees get more.