Just how much is that 2% really worth?
tejusparikh.com
tejusparikh.com
If you'd take the job without any equity then take the job. If the equity is part of your reason for taking the job, you probably shouldn't take it.
Base rate neglect[1] means we are terrible at evaluating the probability of equity being valuable. For every story about someone making millions out of their equity when the startup they're working for exits there are thousands of stories of people who walked away with nothing but a few years having fun solving challenging problems. That is the reason to work in a startup, because that is the definite, concrete thing on the table. If you want to make millions in software, get a job writing code at a bank and invest your salary.
Salary = compensation for doing the job
Equity = compensation for taking the risk of working at a company with a high chance of failure
Therefore, in the future, an employee with lots of equity should still be paid a normal salary/raise/bonus because the equity isn't "current" compensation for doing the job, but a reward for taking a risk long ago.
But ignoring equity entirely is silly. Much better to say that you should consider salary and equity separately. One is for doing the job and the other for doing it now when uncertainty and the possibility of failure are high.
Also, some people (like me) would trade an increase in equity for a smaller salary, so it's not a perfect separation. I had a job offer once that gave me two options to choose from, which was really cool.
In which they suckered you into a false dilemma. You should always reply to those stupid negotiating tactics with "Both. Higher salary and more options."
But I learned a lot from working with him and met people that I still keep in contact with. I don't regret my choice to take the offer.
So the two options you were given was more cash less equity or more equity less cash. Doesn't that negate your point that you should consider salary and equity separately? I don't really see from a financial perspective how you can seperate the two when considering a job as both relate to the risk you are taking.
It's also a little similar to how founders essentially work for free in exchange for lots of ownership. If, as an employee, I can work for less money now, then I'm taking a bigger risk betting on the outcome of the company.
Startups often want to minimize cash flow, and some employees are interested in helping out with that in exchange for having more ownership. So it works for both sides.
But I try to keep "doing the job for salary" and "taking a risk for equity" separate in my mind.
http://www.investopedia.com/terms/r/riskrewardratio.asp
By trading salary (you could get paid more at a big co) for equity you are inherently making a financial decision by investing the difference. Keeping these things seperate is not the same as not thinking about them.
If you are talking taking about taking a pay cut to work with people you really like or to do more interesting or less stressful work then I understand. Apart from that I don't see any reason why you would take less salary unless you think the rick reward ratio was favorable.
Most job offers don't include two options to choose from. Since I did have that choice, I evaluated my options exactly as you mention: whether to (effectively) invest the salary difference in exchange for more equity.
In most cases, job offers don't include that choice. If that had been my situation too, I would have evaluated whether the salary was worth doing the job. And then evaluated whether the equity was worth the risk of joining an insecure company.
But since this isn't an absolute rule, I might have tried to negotiate more equity if the salary wasn't quite high enough for me to make the jump. Or maybe asked for extra vacation time, or the option to work from home. (I've done all of those.) I know salary and equity cannot be kept totally separate, but I do start there when evaluating how I will respond to a given job offer.
But if you are getting a normal salary, what is this risk?
I worked at a startup where towards the end before their buyout, they weren't paying the phone bills, and their core profit center was a call center. When you work in that situation and trying to troubleshoot downed circuits, which turn out to be shut off for non-payment, that's some serious stress.
Right now I work for a government org with some really awesome technology challenges. Plenty if politics, but also security and ok pay. I'd rather have a constitutionally protected pension and startup+ pay than startup pay and no equity
And just to add: my view is that at a startup, "market rate" is too low, even with equity on the table (to a certain extent--if it gets to double-digit equity my opinion is the negotiation isn't about bringing on an employee so much as a legitimate co-founder) especially given the broad responsibilities early employees are tasked with and the high likelihood of failure.
Having a role at a startup doesn't automatically imply useful experience has been gained, or that the specific position and duties are somehow more solid than equivalent roles at established companies.
At most your risk is missing out on, say, a week's wages between jobs.
You should definitely get some premium for this risk - how much is open to interpretation.
At any rate that was advice given to me by my father, who worked in the IT department of a large oil company, had a long line of pointy haired bosses who took the credit for anything that went well, which was eventually gutted and outsourced leaving just him and a couple others as insurance. I've regretted it when I did not heed that advice.
I'd disagree with that. Some of the most entertaining bits of work I've ever done were for companies whose main job wasn't software.
The problem isn't companies who aren't focussed on software. The problem is companies that don't value the great things that software-oriented folk can produce. Unfortunately there are plenty of the latter in the software-focused end of the spectrum too.
Don't work anywhere that treats you badly. Sure. Don't work anywhere that doesn't value you. Sure. Don't work anywhere you don't enjoy yourself. Sure.
But I know some folk who are having excellent fun at banks. Solving stupidly hard problems that fascinate 'em, fostered by great management, and being compensated very well for their trouble.. I know others who have worked at large tech focussed companies that have had bloody awful stories of management idiocy. Hell — I've got more than enough horror stories from smaller tech-focused organisations.
Plenty of non-software companies can live or die on the quality of their algorithms. It could be a small development team but it can be challenging and rewarding. Plus it will give you a bigger perspective.
The key is to work somewhere that you are valued.
Notwithstanding the fact that a ton of companies that would like to believe they're "software" companies really aren't, the high turnover at Silicon Valley firms suggests that working for these types of software-centric employers isn't the happiness panacea you make it out to be.
Working for a "pure" software company is great advice if you are optimizing for overall happiness, but not so much for maximizing your income.
I cannot agree enough with this. I know it's anecdotal, but I've had more than ten jobs in my career so far and the only exception to what you're saying was an initiative by a highly technical and visionary director (later VP), which was scrapped as soon as he left the company.
The point I'm trying to make is that it sure is possible to have a really fun and challenging job as a programmer in a non-software company, but it's a stroke of luck you should never, ever rely on and it won't last. At least, that's according to my experience so far.
I think that this also applies the other way around. If you're a founder building your early team, you should not hire people who want to join because of the equity. You should be bringing in people because they want to work on the problem for the salary that you can give them or promise to give.
If you hire someone who has an expectation that he will make a million dollars in 4 years - it can lead to a lot of bitterness while you are building the product - especially when you are having a few bad months. Have seen this happening a bunch of times.
Equity != Money, equity ~= the percentage of ownership and responsibility.
Edit: Salary AND relatively high ownership of the company / product. Some people don't mind taking risks if they have an opportunity to build and own something great.
I think this holds in starting but ownership and responsibility is more on people's attitude. The equity will also remains the same(in %).
I like your point about not joining/hiring to make few millions in 4 years. It probably is a driving factor in start but wont sustain for 4 years. Again people's attitude.
The entire point of the corporate form is separating degree of ownership from degree of responsibility.
Now let's look at E2 which will be the expectation value of a payout from investing your salary difference between a high paying corporate job and a startup. Let's set this number at a safe value of $50,000/year. Invest $50k a year for 10 years in some safe stock and bond mutual funds and I bet E2 and much higher than E1. Heck, invest $50k year in lottery tickets and you might make out better than working at a startup.
That's not to say you should ignore startup jobs. They have a ton of other benefits. Just seems like equity is not one of them unless you are a founder.
You can think of employee equity as insurance against "I joined Facebook early and all I got was this lousy t-shirt."
FWIW, I joined a startup as that third partner (domain expert + execution guy), taking 10% of the equity while collecting 70k/yr (my base rate is north of 200k/yr otherwise). It would have brutalized the startup's seed money and jeopardized them if I somehow didn't perform and deliver.
Edit: your point is that good engineers cost $150k (really closer to $200k with taxes, etc). That's correct. So what happens when these engineers as a group realize that taking $70k + 0.5% equity is not the same as taking $150k + full benefits elsewhere? What other options do startups actually have at that point? More importantly, will this point happen and will it happen soon?
Everyone keeps suggesting that when evaluating a compensation package, one should not count equity for anything since it's worthless. Well, it is nearly worthless, unless you happen to hit the startup that becomes Facebook, Google, Dropbox, etc. and you get in early enough (usually only employee #1 gets over 1%). So why bother even offering a worthless piece of compensation. The startup might as well include a bunch of lottery tickets with every paycheck instead.
So, there are several bad things that can happen with options/equity.
1. The company fails, the options are worthless
2. The company is moderately successful, but not spectacularly successful. If your unvested options are worth (say) $30k/year, then they have no reason to give you a $30k raise if market rates increased by $30k (either due to a better job market, or your increased experience).
3. The company is spectacularly successful, your unvested options are worth big $$$. Now, your employer has an incentive to cheat you. They can look for an excuse to fire you (not too hard with at-will employment). They can raise another round of financing with a liquidation preference, reducing the value of your common shares. They can block you from selling your shares (Uber did this recently). The executives can give themselves big options grants, further diluting your common shares (happened to Eduardo Saverin at Facebook).
If you are considering taking equity, you should treat it like a potential investor would. Ask hard questions. Look at the balance sheet. Look at the company deck. Look at the previous funding rounds. Research the backgrounds of your potential coworkers. (If the company wont share this information with you... don't work there).
Now even with this, you might say that a person would be terrible at evaluating that equity, and that is probably right. But investors are terrible at evaluating equity as well (considering that most funded startups also fail). But you do the best you can. Of course you need to decide whether you are interested in having a high-risk investment as part of your income, because if not you should not work at an early stage startup anyways. But don't ignore it completely.
If you are considering working for a startup, the value of your equity should not be a primary consideration. Instead you should be so deciding because you enjoy the fact that the organization is small, you can have an impact, competence can result in rapid promotion, you have the opportunity to learn many skills. If you want to be in it for THOSE reasons, then seriously consider it.
When you are in any negotiation you should make all decisions about equity from the point of view of never expecting it to be worth a dime - because it probably won't be - but be ready to trade salary in excess of your actual needs for it because you recognize that the person on the other side is trying to reward you, and rewarding people like you with money makes the company less likely to succeed.
If you work from those principles, then you are likely to choose a job which is a good fit and where you have a good impact. If you instead work from everything as a straightforward economic transaction then startups can't consistently reward you like an established company will.
But I can see you jumping up and down about the potential payoff from equity. If you are a person whose day to day life can be motivated by that, then go off and read http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for... and decide whether you are ready to start your own company now, or want to gain skills before doing it in a bit. Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders.
(Obligatory disclaimer: I have worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder.)
I think this is spot-on.
So I don't think it's quite that clear cut.
Once a company has enough revenue (or investment money) to hire employees, much of the risk has already been removed. A product is either prototyped and tested or partially built. Discussions with potential customers have already taken place. Initial marketing strategies and plans have been made. And founders often do that without getting paid or even a guarantee that they will ever get paid.
They also end up with 10x-20x more equity than an early employee who gets paid a normal salary.
So if equity in a company is highly motivating, and you don't mind working on an exciting idea knowing that you may never see any money, then founding a company might be a good fit.
Or you can make job decisions now that will help you learn to be a founder in the future.
Founding a company is a roller coaster of joy and despair, so it's not for everyone. I haven't tried it yet, but a side project of mine has felt like that roller coaster. I can only imagine that doing it full-time would be the same, except magnified.
Take an established company. If you invest in this company and it has problems, not only could your investment vanish, but you may also be out of a job. There's a lot of risk there for you as an employee that isn't there for the average investor. To me it seems the thing to do is accept the options but cash them as soon as possible while still being smart about it.
Take a startup. You have the same problem as above, but the startup is much, much more likely to fail and those failures are likely to be more catastrophic. If you're not comfortable with that level of risk you just shouldn't do it at all. If you are, then I think you have to take the same approach as with the established company: sell as soon as you are able to sell.
And this is, in fact, what my ex and I did. She worked for a startup. She received options when she started and as bonuses. We were given a few liquidation opportunities (stocks sold to private investors through the company) but otherwise were not allowed to sell while she still worked there. During those opportunities we sold the maximum we were allowed to sell (which was always some percentage of our holdings).
This got our money out of the high risk investment and doing other things. In the long run, the company ended up going public and we could have done much better by holding out, but we still did quite well and reducing our risk at the time was the smart move.
I am not a financial advisor, this is not advice, blah blah blah...
Liquidation preference is what happens when the preferred shares have a clause that says they are guaranteed 2x or 3x what they put in on any liquidity event. So if you take $10mm at 3x liquidation preference then that means any exit has an immediate $30mm taken off the table. A $30mm exit now becomes a $0 exit for the employees. Remember that generally the founders are holding common shares.
Besides what other comments already mentioned (liquidation preferences and portfolio diversification), one must also take into account that (1) investor's equity is safe, while the employee's isn't (if you're fired before the vesting begins), and (2) investors have much more say at influencing the company's future (via more board seats and more voting rights). Also, most employees have much less capital than investors, so the monetary equivalent of the NPV of equity would be much more meaningful to them than to the investors (given that most people are risk-averse).
All in all, as an employee, I would value equity between 4-10 times less than the investors would.
to me, that's a red flag on multiple levels.
Really? Even if some 'banks' pay better, these banks tend to be located in a handful of cities in the world - but there are startups in a lot of more locations.
And it doesn't seem clear that finance firms pay that well: > The average base salary for a software engineer at a finance firm is $92,000, not far ahead of the average base salary of $87,000 for a software engineer at a tech company, according to salaries self-reported by employees on the jobs and careers site Glassdoor.com. http://www.marketwatch.com/story/silicon-valley-vs-wall-stre...
so for a highly sought after trading associate (real example, really high valued financial institution), get 100k base but also getting forward guidance for a 200k bonus at an absolute minimum - e.g. if not turning out to be completely incompetent.
1.) My point was to answer (here, I'm quoting)
> And it doesn't seem clear that finance firms pay that well: > The average base salary for a software engineer at a finance firm is $92,000
by saying (and here I'm quoting the first sentence of my post)
> The best in finance have most of their compensation on a perfomance-bonus basis.
which is a relatively straightforward clarification, and on which point I went on to cite 100k base + 200k bonus.
As to the second point?
2.) I've yet to meet anyone "software engineers at software firms" who "make tens of millions". Or maybe that's just biased to my age group? But the best from my circles turned a 200+ offer to found a startup, and then a year after that didn't work out, has since taken a 300+ offer. I can assure the level of talent required for something like this is, indeed, atypical.
But I also can't say that you're wrong, since I can't say I'm familiar with every outlier case. Just that your experience has been different?
Well, at risk of sounding nasty, I actually don't think what you're talking about -- again, people working as software engineers at software firms making annual incomes measured in multiple 8-figures -- exists anywhere, even as an outlier.
I also happen to know quite a few finance guys at top tier shops who are not quite cracking google-level compensation, even all in. But this is all anecdotal, and may not be representative of shops you're talking about.
This is actually a very good piece of advice.
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Are they less parasitic if they just sit on their money, or are they parasites just for having the money in the first place?
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No, it's the opposite. The vast majority of firefighters eventually have to fight a fire. The vast majority of startups never catch fire.
Just the job security alone is enough to balance out the equity. A shitty salary is not an excuse.
Bottom line: Insist to get paid what you're worth and take any options as a free lottery ticket that will probably never get you anything.
Fully agreed with the other comments: ignore equity in early stage startups and go for a market rate salary.
The one situation where I would take a lower salary is if there's concrete plans that a company will go public within 12 months, and you're going to be in a senior enough job that you'll be in the know about it.
Enter $100k as the startup salary, and zero equity (0 shares, $0 strike price, no funding round, any sale price for the liquidity event happening after 12 months).
Enter $150k as the big co salary, and the default 5.75% rate of return.
The result should be Total Big Co Earnings = $152,875 ($2,875 is the interest gained on the $50k salary diff for 12 months), but instead it shows $196,947!
Here's the calculation. It's a little high because we should be getting 1/12th of the 50k per month and compounding, but I'm assuming we got the full 50k up front and got a 5.75% interest compounded per month.
50000*(1.0575 ^ 12)
97799.02314394798212000000
edit 2: The bug is in this function and the one below it: https://github.com/vijedi/equity_calculator/blob/master/js/a...
If your interest rate is zero, the calculated interest is 11 * the monthly difference. Then it's added to your base big company salary, which is clearly wrong. It should be 12 * the monthly difference added to the startup salary.
edit 3: Opened a pull request with what I think is the fix: https://github.com/vijedi/equity_calculator/pull/4
Edit: Search http://www.tejusparikh.com/projects/equity_calculator/js/app... for bigCoInterest.
Of course, 90%+ of the time they're totally wrong about everything about what they're bringing to the table, and in the other times, they'll often conveniently change things around to benefit them, like, "Well, you know, I know we said 4% of the company once we raised series A, but honestly, your contributions have not been what we expected, and so you really only are entitled to 1%"
To quote "The Spanish Prisoner":
Jimmy Dell: I think you'll find that if what you've done for them is as valuable as you say it is, if they are indebted to you morally but not legally, my experience is they will give you nothing, and they will begin to act cruelly toward you.
Joe Ross: Why?
Jimmy Dell: To suppress their guilt.
Me: I'd rather be paid, say, $250k to do the work in a year and zero equity
Guy: But if the equity will be worth, say, $4 million in a year, why wouldn't you do the work for $25k?
Me: If the equity will be worth $4 million, why are you arguing over it - wouldn't it be better for you to pay me the $250k and pocket the remaining $3.75 million?
Guy: But the $4 million isn't guaranteed! That mightn't happen.
Me: My fucking point exactly!
And even after saying that himself, he STILL couldn't understand why I would turn down the equity...
In an area where there is a high concentration of people who are young (naive) and (relatively) debt/responsibility free it's easy, almost trivial, for a founder to exploit them. I perused Angel List some time ago. The salary offerings were hilarious. It's very clear to me (mid-30s guy with a family and mortgage) that they are targeting a certain age and social group.
Holy crap. Most of the listings there are completely hilarious. They expect anyone to work in the bay area for those salaries? (and I'm a different demographic than you -- 20s guy, no mortgage, family w/ no kids.)
This is almost worse than them lying, insofar as incompetence can be more damaging than selfishness: you can negotiate with a selfish person to get something for giving them what they want. You can't get anything out of someone who can't deliver.
The employee is the one getting the work done. And he's got to watch out for his bottom line like everyone else. If you're being promised equity without a written agreement, then take that into account- assume it's not even part of the equation and negotiate better pay or move on.
If you don't trust the employer, don't work there.
Keeping employers honest with a contract in place is a lot easier than without.
Anyway, you seem to be stuck on this being equal so I have no illusions I'll be able to convince you of the differences.
Just attempting to make the point that one should not take too much comfort in any options package before he/she is over the cliff and unless he/she has seen the cap table.
In my opinion it is far better to secure a high salary and the free-time and autonomy to work on your own higher-risk pursuits, than it is to secure a low salary and share a tiny percentage of optionality and autonomy with others on a high-risk pursuit.
The only exception I'd make is when you're truly enamoured with a vision, a founder, prone to loneliness and need to belong, or don't wish to focus on your economic livelihood at all.
At the end of the day the likelihood is that the high-risk pay-off never comes. Just like almost everybody else you'll become old, have a family and want to be able to provide for them.
I'm a full-time C++ programmer and I'd love to freelance, but I wouldn't know where to even start.
Maybe this makes more sense for web developers
For example, I'm trying to model what a ~5% ownership looks like, and as soon as I add a round of funding that creates 10% dilution with no liquidation preferences, the site says the final ownership percentage is zero. It doesn't even matter what the exit is for at that point, without liquidation preferences, the ownership should still be ~4.6%.
Don't tell us you have the startup bug!
Yeah, I think it was with the equity addition.... Once I did that, my delta went in the negative, and it would have beeen better to stay corporate ;)
Here are the responses available, when dealing with a pain in the ass at work:
Level 1) FU, I don't have to work here.. but I should probably find a job in the sometime near future.. like.. the next year
Level 2) FU, I don't have to work here.. or anywhere. I'm out
Level 3) FU, I don't have to work here.. or anywhere... I'm going to my yacht.
I got level 1 ;)
Overall, if anything, this just serves to illustrate all the complexities involved in trying to model how much a startup's equity offer is actually "worth" in the long-run and that trying to do calculations to model it against an offer at a big company is totally the wrong way to go about it.
It just validates what Mark Suster says here: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...
don't join a startup because you could potentially make millions of $. Join if you want to learn; any money you make would be if you got really lucky and is a nice side bonus.
While I agree that you should take a job at a startup for reasons intrinsic to the job itself, and not just the comp (or possible comp) - it is still part of the offer.
If someone is offering you a form of compensation, that means you should be able to evaluate it. Otherwise the offer might as well come with a guarantee of two unicorns after four years.
Additionally, almost EVERY startup trying to entice people to work for them mentions the equity as part of the sales pitch. "Meaningful equity", "Ownership in the company", "Shares of a pre-IPO company", etc, etc.
So if you're pitching people based off of an intangible, almost meaningless number, that smells like a problem, to me.
I understand all of the complications, the effect of future rounds being an unknown, etc...but is there a way to improve this?
Perhaps if, at the time of offer, and with each change in funding - there was a clearly spelled out, given possible outcome at this time, here's the breakdown of what you get - that could help?
I.e., If were were bought out at $100M right now, the founders would receive $12M, and you would end up with $37k...maybe people could evaluate better how "worth it" it is to them.
Additionally, when things happen like founders getting cashed out for some sort of comfort effect, like "OK guys, you each at least got a million out of this, run the company now with some security behind you"...employees should be made aware.
I guess I just feel like there needs to be more transparency, but I'm not savvy enough to know a good way to offer that.
Once you know the percentage (say 0.1%), you can figure out some other stuff. Asking about the company's hopes to go public or be acquired, and at what valuations, can lead to a lot of good discussions.
Small point: Fixed positioning of column on right (contaning calculations) obscures the bottom few lines on desktop (the result), probably due to expecting a greater vertical resolution. On mobile (Android) it completely obscures all input forms.
EDIT: Works on iOS.
Also factor in the huge one-time payout and how that's taxed at a higher rate than your normal big-company earnings. I know people who got hammered at Federal + California + special-California/Federal-taxes at 50%+ tax rate, all because the acquiring company decided to close a few days into 2013, when tax rates went up considerably, with special surtaxes to boot. A few days earlier would have cut the tax rate by a lot.
That tax is magnified if you don't pre-exercise for long-term capital gains advantages -- the whole liquidity event becomes straight income.
Also, the company may not allow you to early exercise. Ask them before accepting an offer!
I.e. if a founder can expect a payout of $X for working 16 hrs a day he shouldn't be surprised if an employee; who can expect 1/100 of that, only feels motivated to work 8 hours a day.
You can get screwed on AMT tax on fictional gains, you can also lose real upfront money if you exercise at a strike price early for long term cap gains [almost always a bad move for common stock employees, but lots do it because of their borderline irrational hatred of the idea of taxes].