To illustrate, give the best odds. You join within the first 10 people, get 0.7%, after 6 years of dilution you might be down to ~0.2%.
If a company runs a tender offer with a valuation of $200m, your stock is $400,000. Is that a lot? Well considering you probably make 50k-100k less per year in salary at a startup vs a "big company", for 6 years time and considering that you also get other compensation at a big company, that isn't really that rewarding.
Now at $500m, your stock is worth $1m. Its now something worth 6 years of paycuts.
But this is such a narrow window. You have to get lucky to be one of the first 10 and join a company that will be worth half a billion dollars.
If you are not one of the first 10, you need the company to be worth ~$5billion to have your stock be worth it. How many of those are out there?
There are other factors to consider. Do you like big company culture and politics? Do you like being a completely replaceable cog? Do you like having order and process and a well defined job?
Even if you prefer a startup, for most of them you will come out with nothing. So you have to factor in the risk ... you’ll need multiple startup jobs to hit one success.
I respectfully submit that the gap between a and b is measured in thousands of employees and/or plural years of calendar time.
There are other companies one could name which looked like they had a better-than-X0% shot of being One Of The Great Ones (TM) which failed (or may fail) to achieve that promise, but it seems a little silly to me to assume that seed stage is necessarily the highest expected value for engineers.
With a 4 year vest, that equity is worth $150K per year. About what a Top Engineer sacrifices in salary to go work at a start-up.
On the contrary! Just yesterday I got an email from an Amazon recruiter that says:
> We also offer:
> - Stock Package, free shares given to you (no purchasing required)
It seems like it's pretty normal for people to get equity from big companies. Not even just tech companies: people I know working at Nike get stock every year too.
Also I question this:
> The fifth employee will get much more than the hundredth.
Maybe, but the thousandth will get "more" than the hundredth if you measure it in dollars times probability-of-cashing-it-out. VCs talk about how the size of the pie matters more than the percentage of your share, and I think that applies here too.
Right, but equity at big, established companies generally isn't worth potentially $1M+. From what I've seen, it's around $20-50k/year and a calculated part of the compensation package.
* would these values be different for a new grad vs a senior engineer?
Even ycombinator does not fall for that, they invest in thousands of companies and they have a lot less to lose than many employees.
There is even a kind of natural balancing mechanism here, in the sense that the earlier you join a company, the more likely it will die quickly and free you to take another shot. So the riskier the equity you opt for, the more rolls of the dice you'll get.
When you're working at a company you'll have access to all sorts of insider information, which you could use to make some informed large bets.
Also note that at a startup "equity" usually really means "options on equity" (unless you're a founder), so you actually can work somewhere for a bit before deciding to take a position that might not be optimal from a diversification perspective.
How do you increase the value of an option? Increase the volatility. Continuing to minimize risk is not going to meaningfully change your lifestyle. Your call option already protects you on the downside, so you should try to blow it out on the upside, and take a risk.
You can also view your experience and skills (and the minimum salary it allows you to command in the market) as the same thing. After a certain point, try for something that will meaningfully change your lifestyle. Worst case, you can fall back to that floor salary.
I passed up on google to be one of the first employees at a promising startup that ended up raising high 8 figures and is now at nearly 100 employees. I took a pay cut for that equity and worked 12 hour days alongside the founders. With liquidation preferences and dilution I won't even be able to take a vacation with that equity if there's ever an exit.
My college friends who picked Google are now making >$300K and have enough money in the bank to have a diversified portfolio and acquire the right type of equity.
So unless you're a founder or an investor ignore the equity. You can still go for a startup but do it for the experience and potential to have a real impact on an organization.
I am at the 5th year in a growing startup where I was employee < 10 with initially 1.5% which became ~0.8% after 3 rounds of funding (~60M$) all at liquidation preference 1. The startup is now 150 employees and valued ~200M. Equity has been painfully exercised so I can both leave if needed, as well as her long term capital gain one day (or should I say capital loss?)
Thanks
2 years ago I would have told you you’re full of shit, but I’ve since been through this myself, and I can confirm: this is 100% right. Even in the unlikely event the startup exits, and even more unlikely event that it exits at $100M+, typical non-founder stakes do not offset the partial loss of cash and RSU income, particularly when one factors dilution and liquidation preferences into account. Took me 2 years to snap out of it. Never again.
I am at the 5th year in a growing startup where I was employee < 10 with initially 1.5% which became ~0.8% after 3 rounds of funding (~60M$) all at liquidation preference 1. The startup is now 150 employees and valued ~200M. Equity has been painfully exercised so I can both leave if needed, as well as her long term capital gain one day (or should I say capital loss?)
Thanks
I’m not saying don’t think about equity, but don’t let someone sell you a bill of goods either.
Beware the availability bias here. Nobody tells their story of working for salary all their life and not getting rich because that's not newsworthy. It is news when people work at a promising startup for equity, but it fails. So people fall victim to the bias of thinking there's more of a problem with equity than wages, because that's the failure case they hear about more often.
The risk of not getting rich from wages is 99.9% (number of 9s depending on your definition of rich). The risk of not getting rich from equity in a series of promising startups over a career, can be less than 50%.
As a founder, that dynamic completely changes, of course.
I'm not normally a pedant... but... it can be also more than 99% and it can also be less than 1%...
So I'm not really sure what that brings to the discussion! :)
Almost anyone who gets employee-level equity in a standard DE C corp will receive such a small piece that the voting rights are largely irrelevant. I was a sub-1% shareholder in a recent M&A transaction where a place I'd worked was getting acquired. I didn't like the terms. Too bad it mattered exactly zero what I thought.
The real question is why a company that's taking a bunch of capital is incorporated as an LLC? That's a rookie mistake no founder associated with any reasonable incubator or investors would make.
So many founders get rich early by selling their stocks to investors when raising money. Most of the time, employees just can't because the board won't let them.
If we allow employees to sell their stocks after they are vested you reduce the amount of risk they take when accepting a lower salary for higher equity. It would also stop the mentality of considering equity as zero when evaluating offers and give more financial flexibility to employees.
There is so much money circulating in private markets, but employees just can't access it. This seems pretty unfair to me.
Isn't this almost certainly by design?
The nice thing about working for a company that has raised a bunch of money but is still quite small is that you don’t necessarily have to sacrifice salary either. When I joined I got a 50% raise from my previous base salary at a big 5 tech co without negotiating.
EDIT: I’ve also heard there’s a secondary market for private co equity that I could maybe use to liquidate early if necessary, but I don’t know where that stands legally and don’t even know who is talk to to figure out if that’s an option.
So which is the hot company these days where all the smart folks are going? Asking for a friend.
That the world pays off equity in a company orders of magnitude better than labor for a company is the real thing that will complicate a young person's worldview.
Early investment is virtually worthless without subsequent investment. Dilution means the last shark gets the spoils. If you're still there when the shark has done eating you might get some scraps.
While I agree with the general idea that there are more ways than wages to earn wealth, I think the advice is more general: focus on ownership. Figure out how to buy or create an asset and work on improving its value through your labor, capital, or other real (non-financial) forms of investment: time, attention, promotion, whatever. This advice is surprisingly general and has made a lot of fortunes. Think in terms of the business being an economic machine, and you as its tuner (devs will be surprisingly used to this view of things).
House flippers focus on ownership by buying a house, improving it, and then selling it.
Private equity acquires companies, "fixes" them, and then sells them, often back to the public markets.
Venture capital acquires promising stakes in young companies. They put in a lot of sweat equity in board meetings, advice, introductions, and follow-on fundraising to make their portfolios worth more.
Anyone who owns a house gets rich if their house appreciates. Especially if they use leverage.
You can do this all sorts of ways. Build vs. buy is an important dimension.
Where I disagree with JL is the general idea that investing heavily into a single company with high uncertainty and little control rights is a great idea. The main reason YC took off is largely Jessica in my opinion, marketing the program exceptionally well to talented people who knew no other way than to work for wages at a company. It worked great for them (the YC partners) because they became investors in 1000+ companies, so it's virtually certain that, given the caliber of people they're able to convince to apply, that they'll have a few billion dollar "hits". The situation of an individual employee with only one company's (startup's) stock is quite different, and in my opinion, much worse. So maybe not such great advice at face value.
Yes, true.... but many more take pay cuts for equity that ends up being worthless. Equity is the way to get stinkin' rich, if you are lucky. But a salary, alongside proper savings and investments, still gets you rich enough to not have to worry too much about money later in life.
options are a lottery. do what most inspires you. it will give you the most satisfaction and also the most skill (doing what you love and being really good at it go hand in hand). Then figure out if a startup is right for you for all other reasons.
