Comment by ChuckMcM | Hacker News Reader

Comment by ChuckMcM | Hacker News Reader

I am not sure I understand Aaron's point in this.

Is it "We should pay people more?"

But isn't that really a question of whether or not you can find people who will work for the salary your offering? If you can't you raise what your willing to pay until you find someone who will right?

Or is it "We should make options always remunerative?"

In which case they aren't really options are they? They are just salary so why not just switch to a fixed + variable salary system like so many folks do. Heck you could even go all pay to perform like sales folks have been paid for ages, "Get this code done, you get paid, don't you don't." I personally don't think that incents the best choices but it can motivate.

If you want to write into your corporate by laws that every round of funding includes a 10% of the shares in the funding must come from employees common stock, and you always divide by 'n' (the number of employees that want to participate) the amount of stock they can contribute, well that is ok, except your converting common to preferred in that case and the SEC is going to ask a lot of questions about that.

There is the perception that founders of unicorns are rich, but trust me, they aren't, what they are is "rich on paper" and when they can't raise any more money and they are running out of cash on hand, the founders stock is going to be worth just as much as the employee's stock, which is near 0. So it will all even out. There are a lot of people who were working in the Bay Area during the 90s (and I'm one of them) that were multi-millionaires on paper at some point, and that same paper because worthless sometime later before it could be converted into cash. Did I "lose" 12 million dollars? No, of course not. I never had 12 million dollars, what I had was a concatenation of increasingly improbable if statements which if the 'true' path was followed to the end, could be converted into $12M. Since not all of those if statements resolved true, the actual result was about $83,000. Lots and lots of people had the same sort of experience.

Aaron, if you're reading, what problem are you trying to solve?

I think it's more along the lines of "the old way we used to value and award options/equity isn't very compelling for employees these days. We need to think of better ways to give employees ownership."

That's a real problem for people trying to start a company without a lot of cash. If it's to be useful as compensation, equity should be valuable, but it's not because the payout is so uncertain and so far away. Throw in terms that leave multiple opportunities to kiss the whole payoff goodbye just because of life (or worse yet, get screwed over by the IRS), and it's no wonder employees don't particularly value equity.

Typical option agreements are not terribly effective, so you may as well just pay cash unless there is a better way to distribute ownership in today's environment.

It's not a simple problem to solve. Saying "give more equity" doesn't really do it if the problem is that the likelihood of seeing a payout is too small. And making the payout more certain is not easy.

If that is the problem, to make it more compelling, then you're simply advocating a pay raise.

Equity is called compensation but anyone who is working at their second startup should understand that calling that is misleading at best. Since the average tenure at the 'first startup' is about 2 years, consider it a 'masters program' in learning about what is and what is not compensation.

So if you're going to take equity in lieu of cash you need to understand how to compute the expected value of equity. And in early stage companies its almost always zero. In an acqui-hire sort of situation it is zero and your retention package is based entirely how important you are to making the eventual use of the technology successful. Doesn't matter if your a founder or not, if you're not useful you get nothing, if you are you get something.

But lets step back and ask the question again, if "equity" is the deciding factor in your decision as an employee to join a startup, then you are clearly doing it wrong. If you want equity to mean something, join a company that is already publicly traded, then those ISO options or RSU have real dollar value that you can compute using Black-Sholes or any other method. Stock in a pre-series B startup exactly equivalent to the collected wishful thinking of the founders and investors. And all of them know that if they get their money back they will count themselves lucky.

What is broken then is not how we compensate people coming into startups, it is the misconceptions they have about how startups work, and the fundamental fact that "stock in a startup" is even on the list of things they want. All you can ever ask for is interesting work, people that are fun to work with, and enough salary to pay the bills and put money into a 401k. If you have all of those as an employee than any stock you get that happens to become valuable is all bonus.

A pay raise would do it. But actual money is hard to come by in an unprofitable high growth company. What is really desirable is a way to distribute equity in a way that is not so complex from a legal and taxation stand point, is manageable for employers, and is understandable by employees without a finance degree. That's a pretty hard problem, and the shift in exit patterns over the last 10 years has made it even more difficult.

The realization of the ideal that you can just get a percentage of the company for putting in your time working hard is largely elusive. I think that is the problem to solve. I'm not terribly optimistic there is a way to solve it outside of "don't give as much equity since nobody wants it", but I like to think there are smarter folks out there who can come up with something.

Chuck - the problem I'm trying to solve is that there's a mismatch in expectations around the value of options in comp discussions. The options are often a large portion of comp, so that's pretty bad.

The pay to perform model could work, but that would raise burn quite a lot, which is something startups should be very careful about.

End of the day, options are an imperfect way to incentivize employees, and they work better when both sides are thinking about them right.

Ok, that is helpful. How is the expectation being set? Do you feel like people are lying to prospective employees about the possible value or are the prospective employees lying to themselves?

Lets consider other scenarios, people buying a lottery ticket. They choose to believe that its possible it will be worth millions but the expectation is that it will be worthless. Do we put up a large explanation about how unlikely it is to win anything in the lottery so that people will stop buying them?

I get that especially young people with little experience will delude themselves into believing a big chunk of equity will mean a big payday later, and take a lower salary to secure a larger chunk. But it isn't that anyone has forced them, they are just inexperienced. They will likely not get any extra benefit and the next job they will negotiate harder on the salary and be less swayed by equity. At some point they might be "cash only" type of people, no equity required.

The biggest problem with stock in my mind is that the investors aren't aligned with the company. The investors want a payout, period. If they can fire everyone and sell off the two patents and get 2x their money back, fine, they will do that. They want the company to be successful so that their investment is worth more, but they don't really care how it is worth more really.

Equity "payouts" haven't changed a whole lot in 30 years. There are an extraordinary number of millionaires and billionaires in the tech industry (compared to other industries) because of the wide and generous distribution of shares. Not everyone is a winner, but nobody really works at only one company either. Five to ten companies is more like it, and often the equity grants from one or more of those companies provides additional financial liquidity to the employees.

I'd agree that first time startup employees are often way more optimistic about their stock than more seasoned employees are, but I have never met anyone who has been through 2 or 3 such companies to have unrealistic expectations any more. That is why I have a hard time seeing what we can do to change it, on the job training is on the job training.

Sounds like this is an employee education problem at its root. Naive job candidates are evaluating offers and way overvaluing their equity compensation, sometimes even allowing it to substitute for cash. As discussed in a separate thread, the consensus is that options (vested or not) in a non-liquid company should be valued at or close to $zero. This could be an education job for college Career Services.

Coming out of college, very few people can even conceptualize risk, randomness, and the possibility of a variety of outcomes. Pretty much the whole education system is based on a series of "If you take this action, you will be rewarded in this way" choices - if you complete your homework, it's 10% of your grade, if you bomb the midterm, it's 33% of your grade, your GPA is the average of all your classes, if you make a 3.0 GPA you can keep your scholarships and if you maintain a 3.5 for 2 semesters you make the dean's list. Get good grades and good SAT scores and you'll get into a good college and be set for life.

I've often wondered whether the best education that you could give youngsters would be a course that was probabilistically graded. If you work hard and ace the tests, it would increase the chance that you get a good grade - but your final grade also depends on things like the teacher's mood, the roll of a d20, the stock market performance on grading day, and whether the school gets a fat alumni donation that quarter. But I can imagine the public outcry if such a policy were enacted. Parents would sue the school, claiming that they've ruined their kids' chances for getting into a good college.

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