Now I work at a large tech company in SV and wont be involved in another startup unless I'm a founder.
Surely this must reduce the quality of the talent pool available to new startups, as the experienced developers conclude that other options are a better use of their time.
Second, regarding the talent pool available to employers, two factors confound the analysis: the first and by far the strongest is stated preference vs. revealed preference --- to wit, good developers will make large concessions on comp in exchange for working at companies that seem more fun; the second is that software developers are as a demographic cohort terrible at negotiating.
The failing is not that the employee equity math rarely works out, it's that the "industry" is so focused on equity. It often falls short as a recruiting tool (a significant number of prospective employees are clued in to the fact that it's likely to be worthless) and it's usually a poor retention tool as well (just look at startup turnover and the number of employees who don't stay with one company long enough to fully vest).
The startup value proposition today is actually quite compelling in some cases. Employees, many of them young and without significant real-world experience, can earn six-figure salaries working at companies that, without outside investment, could not sustain themselves.
Too much capital chasing too few opportunities has given many startup founders the ability to raise capital on terms that are insane. I mean, you have entrepreneurs raising million-plus convertible note seed rounds with caps that make absolutely no sense. Where does all that cheap money go? For many if not most startups, one word: salaries.
If you're being paid $120,000/year plus benefits to work on a CRUD Rails app at a startup that probably won't be around in five years, you should forget about equity. You have already won the lottery.
This allows us to:
1) Justly reward our employees to the upside (with cash, delivered semi-anually) if things go according to plan
2) Automatically controls costs if we don't perform as a team
3) Achieve upside fairness across early vs late employees since we can adjust the bonus % as we hire each new person
4) Eliminates oddities due to variations in company valuations where swaths of employees end up underwater due to bad luck of timing
Downsides:
1) the tax treatment of bonuses as income rather than capital gains is nominally worse; but given the complications with options, it probably works out better for all but HUGE equity gains
2) this plan might not work well for a company that will be pre-revenue for many years, but that should be a pretty far outlier case.
All-in-all this allows us to offer the opportunity for employees to earn above-market comp without having hope they get lucky with company growth, market timing, and their timing of joining the company.
It's been 3 years now and so far, so good!
Of course, that's still talking about equity, which gets back to the fact that it really is best to treat your equity as little better than a lottery ticket -- something with the possibility of turning into a modest bonus and the remote chance of making you wealthy.
> experienced developers conclude that other options are a better use of their time.
Which I suppose is part of the reason the startup labor pool skews young. Occasionally, though, experienced developers get bored and need new opportunities too.
Also because if they are worth something, it's a motivation for the company to fire you before you can cash out. E.g. while the discrimination case against Google was settled out of court for undisclosed terms, whatever the motivation, the timing of the firing of Brian Reid 9 days before the company's IPO was clearly not an accident. (119,000 options, $10 million on the day of the IPO, lots more later: https://en.wikipedia.org/wiki/Brian_Reid_(computer_scientist... )
Given that we're living in a mostly post-IPO world, you could well be better off never getting options....
Even well-funded startups give me pause. I'm not interested in putting in founder-like work for entry-level employee-like compensation plus a lottery ticket. Unless the equity is meaningful and imbues the recipient with an actual, real voice in the direction of the company it's just a way to sidestep offering real compensation.
I'm actually sitting on a huge pile of vested options at a company I left a few years ago, but I'm unlikely to ever exercise them during a sale because the strike price is almost guaranteed to be higher than they're worth.
I also know quite a few folks working a big startup sitting on lots of options, except the startup is on something like a G round of financing so they're likely diluted to worthless. Most of them started working there right out of college and don't understand how it works, and the company salary caps employees...it's a cool place to work but they're likely to get screwed if they're ever acquired/IPO.
One thing I've learned after working at quite a few startups as a non-founder is this, ignore the options and try and get the best possible salary you can. If you get some options, that's cool, but don't count on them for anything.
Both are off my list because I'm not lucky enough to join the next Facebook and I'm not capable of founding a company myself at the moment.
Getting sweet $170k salary with some bonus, massage, free food and shuttle is good enough for me.
As a general rule of thumb, if a company is willing to do the extremely expensive action of acquihiring, they are willing to part a pretty high amount of equity of employees. Not acquihire-high of course, but a pretty good amount.
Of course, it could be argued that they aren't "startups" by that point, but "growth companies."
There is also a major information asymmetry. They know the ins-and-outs of the stock types and likely acquisition scenarios. It is not likely you are going to go over the company financials and corporate documents during the interview process. You just have to hope they treat you fairly.
(If my current company doesn't work out, this is how I'll do it next time around)
He could try this: http://michaelochurch.wordpress.com/2013/03/26/gervais-macle...
I'll just take the higher salary and use it to fund my own ideas which I control 100%. Equity without say into decision making is practically worthless.
You're making the right call. I'm probably older than you and I've done two startups. My career hasn't recovered from the lost time. Total waste.
Most startups (by startup, I mean "company focused on such rapid growth that VC investment is mandatory") are pure shit. They fuck up your finances, drain your emotional reserve, and (unless you're a founder) often spit you into junior roles that you won't be able to stand after a taste of real autonomy.
If you don't learn much, then you've wasted time. If you do learn a lot (which you can, with a good run as de facto CTO) then you still end up in a junior role, due to your lack of credibility on-paper, for which you're massively overqualified. That's the worst outcome, because you're better off actually being junior if you're in a junior role; overperformance is far more dangerous (in large companies) than underperformance.
I have no delusions that my option grants will turn me into a millionaire, but my salary is good/great, and I'm able to live well below my means (in San Francisco, even).
I tend to think startups messing up your career is more of a function of your selection of company and attitude than anything else. It's just a job. It'll only break you if you let it.
It's even bleaker for non-technical roles IMO: get hired as an "office manager," try to do everything asked to a high standard, and end up as a janitor, concierge, personal assistant, accountant, and collections manager for accounts receivable, all while getting paid as a receptionist.
I report to 'architects' who haven't done or know 1% of me. By the fact that they've hopped 10 mega corps and with some neat interview skills always ensures they take home big salaries and bonuses.
While technical skills are good. Soft skills, social skills, a strong network is ultimately what really matter in the real world. Focus on that with a occasional focus on tech trends. Once you do that you can relax in positions of authority to make junior devs slog for you.
I thought it was very intriguing, if perhaps hard to get off the ground. Definitely would be a good antidote to the kind of SV craziness you describe, but of course not really in line with the status quo. I'd like to see some more discussion on this, and maybe get involved (though my business knowledge is near nil).
Why? Can you explain.
ISOs are not only worthless 95% of the time, they're also actively EXTREMELY DANGEROUS 50% of the time if they're not simply worthless.
My suggestion: get a salary, and buy just-IPO'd stocks from companies you believe in.
If you find yourself ready to buy some ISOs, I further recommend you IMMEDIATELY sell them, as in have the buyer sitting there with you as you purchase the ISOs, and do the trade instantly thereafter. Take the short term capital gains hit. Do not hold onto them no matter what any CPA or tax attorney tells you unless they can talk at length about ISO+AMT Tax Trap and assure you you cannot possibly have that happen to you.
The best solution I have heard is from Adam D’Angelo at Quora. The idea is
to grant options that are exercisable for 10 years from the grant date,
which should cover nearly all cases
There is also a precedent for such type of clarification updates in YC family. YC founding partner, Jessica Livingston, provided a clarification with respects to Sabeer Bhatia of Hotmail vs. DFJ ventures based on the statements Bhatia made in an interview with her for the book "Founders at Work".
Having to keep track of "large" (unsure of how to quantify that) percentages of the company that might be purchased at a later date seems like a liability that the company wouldn't want to have to track, especially as a startup with other things to focus on. They're useless to the company, the only upside is for the employee.
It is indeed not useful to the company, and a great upside for the employee. Out of all suggestions in the article, this is probably the most employee-friendly. But that's not a bad thing if it helps recruit good employees, or otherwise seems like a fair thing to do.
The usual 90-day limit makes employee vesting almost meaningless. They either wait for an acquisition (and get all their options accelerated), or leave before that (and lose all of them). Few employees have enough spare cash to buy out their shares.
Don't agree: the company already got the benefit.
Not to mention employers often try to avoid even telling employees what fraction of the total company their options represent, and definitely don't care to share their participation multiples. They're often very happy to let you think that in the case if a liquidation event, you get (exit amount) * (your ownership fraction) which just isn't true.
@apta: see [1] for a numerical example. You get taxed twice (or three times if someone is stupid) on typical ISOs:
1 - on grant, if the strike is less than the fmv (there are huge tax penalties for this, both for you and your employer, so it oughtn't happen)
2 - on exercise when you convert the option to a stock, on the spread between fmv and strike (but probably amt, depending on the type of option; it's mildly complicated)
3 - on sale of the stock, on the spread between the sale price and your basis
As part of your compensation package when you sign up, you're granted a set of unvested options. The idea is, as you work for the company and provide the value you've promised, the options become vested and are actually yours.
So why do you need to stay there to keep them? If I work at a company for a year and 25% of my options vest, why are the terms surrounding their exercise different depending on whether I choose to stay or not? I earned those options by working there for a year. Why is it fair to take them back if I decide to leave instead of stay?
Yes, I get that you're agreeing to that up front, so it's not like you should be surprised when the 90-day limit kicks in. I just wish option grant agreements weren't structured like that, but the employee has pretty much zero power to change that; these grants are pretty much take-it-or-leave-it, and the only point of negotiation seems to be in the quantity of the options. At best.
If I were a prospective employee I would never take a deal like this, because it is really difficult to have that much trust in a company and founders that you likely don't know that much about. I can't say the standard 4-year vest with a 1-year cliff is the most optimal situation, but from an employee perspective it is way better than 10/20/30/40.
1: Though it could be, I know there was a story about something happened at Zygna like this
In other words, if scumbags control the company, scumbags control the company. Fortunately, most people aren't scumbags.
No one is.
But money changes things. Let's there are two best friends, you offer the first person some money to back stab the other. The guy may not agree. However keep raising the offer and at some point of time when the figure hits a $X0/$X00 million I bet the guy's intentions will change.
Every one sells, its just the number that differs.
Most people aren't, perhaps. Most people who have the connections to be VC-funded startup founders are scumbags.
All things being equal, I wouldn't take a 10/20/30/40 over a 25/25/25/25, because it would be economically irrational to do so. But all things aren't supposed to be equal under the two structures.
I had a comment on another thread recently proposing something in a similar vein to help employees understand what their stock options mean/are worth: https://news.ycombinator.com/item?id=7584320
Instead I am working on giving vendors and employees a convertible note that is based on their performance month-by-month. Let's say an employee or vendor is taking $5000/month less than they should be because it's a startup. The company credits them $5000 to their note each month (this can be more if there's a risk premium), and adds any performance bonuses as well as they come up. This lets management clearly track performance against the shares they are giving, and lets the employee know that if they work more they can get more. As time goes on the value of the note increases and the employee can converts their note to shares at the current valuation (or a discounted valuation).
This seems a lot more flexible to me than options, and is less stressful for the founder and the employee. Am I missing something?
This entire post is about finance. Not about business, not about products, not about customers, just finance. Personally, I understand just about half of the entire post.
To be clear, I don't think this is a bad thing. I envy Altman for understanding this (and for running YC at an age younger than mine, but that's another thing). But that's not my point. What I wonder about, is whether this is inevitable for successful enterpreneurs.
Is the path programmer->enterpreneur->finance the obvious one? Sam's path might've been odd, given that his startup wasn't the next Facebook, but you see the same in startups that are the next Facebook, such as Facebook. Zuckerberg used to be a PHP hacker and now he's this NASDAQ CEO. I'm not sure about Drew Houston but all I read about Dropbox recently were acquisitions.
Does growing business make you a finance guy, or do you need to be somewhat of a finance guy to grow a business? I'm really curious which is the chicken and which is the egg here.
(at least in private markets)
PS. I don't think it's fair to call him a "financial guy" based on one post.
Another smart ambitious person might start on a different side of the mountain and keep climbing.
Of course it makes sense on a higher level, e.g. when wanting startups to be desirable workplaces, or wishing for their own ecosystem to be a fair place etc.
So, maybe not your average "financial guy"...
1) YC's incentives look very different from VC's: they get common shares, not preferred. This means their incentives are more aligned with the founders than with future investors (for example, if a VC has a controlling stake in the company & wants to fire the founder and dilute the common shares to basically nothing, then YC gets similarly diluted).
2) The dilution effect of the option pool on YC's shares is trumped by the dilution effect of future investments on YC's shares. If expanding the option pool has a marginal dilution affect but dramatically increases the likelihood of success, then that's a no-brainer for YC to push for.
3) YC's business model is dominated by the extreme outlier successes (e.g. Dropbox, AirBnb). Thus, YC does better by doing these three things better:
A. Increasing the likelihood that future successes are funded by YC (i.e. the founding team chooses YC early on)
B. Increasing the probability that a startup will become an outlier success.
C. Given that a startup is becoming an outlier success, multiply that success to the extent possible.
This piece hits nicely at each of those points. For A, YC takes a leadership role in how to structure a cap table, making founders look more to YC. Also, YC startup employees (ie future YC founders) think better of YC. For B and C, once a company grows beyond the founders, each employee makes very meaningful decisions on a daily basis that impact both the company's likelihood of success and magnitude of success. Aligning these employee's motivations with the company's further helps make these decisions better for the company.
Imagine a well to do company of 2 founders (in SF/Bay Area) and a team of 3-4 others that raised a seed at 10m cap. They want to grow their team headcount to 15 and are busy hiring, running servers, etc. They can offer a 100k salary (more than enough to live on) to a sort of senior engineer or PM and want to compete with Google on total comp. Let's say they need to make up the other 100k difference in comp & salary with options. Over 4 years, you're looking at a 4% equity chunk to one employee, the 6th person joining the company.
Not that I think numbers in line with this aren't realistic (I do agree with Sam that more generous equity grants are better), but for most companies that make a 15% option chunk for employees it's difficult to rationalize a number like that.
Edit: Also, that puts the equity comp of that 6th employee (or 10th, because in most cases you will have a similar equity bracket for those people) at about 1/8th of the founders, not the 1/200th that Sam mentioned. I wonder how many people have made offers to employees with a similar comp plan.
When you reach a certain point, say your mid-30s and you have kids your financial obligations can extend far beyond what people think is necessary to 'live on'. You have retirement contributions, savings for college, long term care for family (most people believe it or not, have to help their parents out at some point).
As a sibling comment mentioned, working at startups, especially early stage startups, isn't for everyone. If a person has major financial obligations a more steady job with less uncertainty (and less potential for upside) is probably the best fit.
There may be valid reasons to work for a startup, but thinking you will be paid to the best of your ability or god-forbid, thinking you will get rich is not a valid reason.
But yeah, on average, it's not going to be as good as Google. Pick your startup carefully.
Low-single-digit percent equity stakes vesting over 4 years for those employees is pretty in-line with what I've seen on https://angel.co/salaries.
"It causes considerable problems for companies when employees sell their stock or options, or pledge them against a loan, or design any other transaction where they agree to potentially let someone else have their shares or proceeds from their shares in the future in exchange for money today."
What are the problems with these schemes? I'm presently employee #1 at a startup, and 99.9% of my present net worth is tied up in illiquid paper there—the rest is a 10 year old station wagon and some Ikea furniture.
I'd really like to be able to pledge my options for a loan to buy a house, so I'm curious to know the issues which may arise from such an arrangement.
There are a lot of reasons why they are pursuing their own ventures. A common one is: "It's not worth it to be an employee of a startup. You need to be a founder. (Or maybe employee #1-5.)" You may disagree with that belief, but it's certainly a belief many hold. Sam's suggestions may take this reason off the table.
Yup. If you can get a job at a tech company that offers high compensation, you will likely make more there (and gain lots of great experience) than you will at a startup.
Look at the value over 4 years: - Startup salary (~$100k-ish) vs. Tech co (~$140k-ish+) - Startup equity could be worth $1,000,000 if you get 1% and the company sells for 100 million (obviously there can be other factors here, but lets just use that number) - Large co. Stock grant could be 150k-200k+(or more!) over 4 years, and you'll likely get refresher grants on top of that each year. And the stock price will likely go up over those 4 years. So after year 4 you are making quite a bit off of your vesting stocks.
There's also a pretty good chance the startup will fail, which would net you nothing but a sub-market salary for the last few years, so it will be harder for you to negotiate a higher salary at your next gig. Or if you are acqui-hired, you'll get some small hiring bonus and then have to wait 4 more years for your new stock to vest.
To me, the only time joining a startup and taking below-market compensation is if you are just starting out and want to gain some experience you might not get at a more established company, or perhaps your skills aren't up to par so you can't get past the interviews[1].
Or maybe you just like the "startup culture", and that's cool, but why not start your own thing instead?
[1] Note that if your startup gets acqui-hired, you'll probably have to interview anyway, which could result in not getting an offer!
If you can’t afford to exercise your right to buy your vested shares (or don’t want to take the risk) then there’s no need to despair – there are still alternatives. There are a few funds and a number of angel investors who will front you all the cash to purchase the shares and cover all of your tax liabilities
And he goes further:
If you’re interested in learning more about financing your stock options then send me an email[2] and I’ll make some introductions. I’ve set up an informal mailing list, and have a group of angel investors subscribed who do these kinds of deals all the time.
[1] http://blog.alexmaccaw.com/an-engineers-guide-to-stock-optio...
[2] the link is to alex at alexmaccaw.com
Does anyone have any advice for how to go about learning more about employee options? I realize I sound dumb, but better late than never.
Some questions I've always had but have been too afraid to ask:
- How does one exercise their options?
- What taxes are there and when do you have to pay those?
- In the above scenario, what factors are involved in me actually getting that $500k?
- What questions aren't I thinking of because I don't know enough about any of this? For example, I've never asked about my options since signing the paperwork: was there something I would have had to do already that I haven't, and will likely screw me in the future?
P.S. Throwaway for anonymity (because I am embarrassed to have to ask!).
A numerical example: 20k shares with a strike of $0.11; fmv of $0.39. Then I write the company a check for 2e4 x 0.11 = $2200 dollars and report income to the irs of 2e4 x (0.39-0.11) = $5600 (for amt).
A nuance is if the company is succeeding, it can be worth it to buy options when they vest; it starts the clock ticking on long term capital gains and can roughly half your tax bill if and when you can actually sell the share. Which reminds me: you will pay taxes twice: once when you exercise the option to turn into a share, and again when you sell the share. If you are lucky enough to go public the company will often get a firm that handles all this for you and just gives you a check net of all taxes.
A good accountant will cost $500-ish (or less) to go over your situation in detail. It's worth the money. If you already pay ab accountant, not someone at hr block or similar people who just know how to fill out paperwork, they may go over your situation for much less money.
Also, you must understand amt; that can bite hard. If you don't understand amt, see that accountant.
As someone who's lived through this, immediately (as in the same hour you purchase the ISOs) sell the ISOs. All of them. Take the short-term capital gains hit. The alternative can and will destroy you.
What happens when they ignore all emails related to exercising? I had this problem and I even followed up by CCing the controller and CFO. It turns out they didn't want anything on "paper" so they just ignored me. My offer had the options in it, but they never gave me the option paperwork. I hear they finally granted the options a year ago to people still there. I think they were playing games trying to lower the FMV or something. I'm not sure it was all legit.
2) Take the documents to an attorney for advice on how to proceed.
No reason to be embarrassed. You don't know something. There is always something you aren't going to know. Also, the smartest people are the ones that always ask questions. They are not satisfied accepting things, they seek to understand. And that means saying "I'm ignorant of this. Teach me."
Anyways, I'd ask whoever handles this for your company. Whether it's your founder, CEO, HR, or whatever department depending on the size. Someone is handling this for them, and I guarantee if you don't understand it, someone else doesn't either.
And, if the company hasn't made clear the value of what you have, then they aren't benefiting from it. After all, if you knew that if the company succeeded, you'd get $500k for it, you might want to work harder. What's the point of an incentive if it doesn't incentivize.
I'd love to get Sam's (or anyone else's) thoughts on the 10%/20%/30%/40% 4-year vesting schedule that was mentioned. I don't like this schedule for two reasons:
1) It creates larger discrepancies in what employees earn over time relative to each other. If employee #1 joins today and gets a 2% grant, and employee #20 joins in 2 years and gets a 0.2% grant, then in year 3 of the company, employee #1 will vest 30x as much as employee #20, instead of 10x with the current 25%/25%/25%/25% scheme.
2) This scheme seems to replace and/or ruin refresher grants. Currently, if you do a good job, you get refresher grants every year or two. With the 10/20/30/40 system, you're already getting higher and higher compensation over time, regardless of performance, and the bump from refresher grants while you are vesting your original grant becomes minor. Furthermore, the drop from what you vest in year 4 to what you'd vest from just refresher grants in year 5 becomes much more dramatic and much more likely to push someone to look for other work.
What do others think?
My take on it as a startup employee is (1) no, (2) hell no, and (3) your company sucks and you are doing this to attempt to lock me in. Also, hell no.
Most engineers I know with stock options and a discounted salary would have been much better with a higher annual salary and no stock options at all.
Pushing the subject further will make you look like you're nosing around where you shouldn't, often leading to the offer being dropped (this has happened to me).
Not to say it wasn't a not-so-great company to start with, but a dropped offer is a dropped offer.
"Here are options to buy 10,000 shares"
"Umm. Thanks. Is that a lot ? Is it peanuts ?"
Without knowing the second number you might as well not be having that discussion.
Simply knowing how many shares you were granted without knowing how many total were issued tells you nothing about what your shares are worth.
If a company wants to issue you shares as compensation but won't tell you how many total are outstanding, run.
Take the market value of a job minus the amount the employee is actually paid (the startup discount) and pay the discount in stock -- common shares (VC's will be in preferred). All employees should get 2% of salary as a starting point in shares. Allow employee's to buy additional shares by forgoing comp or simply investing. Peg share price and timing of share grants to Rounds or any investment (Notes).
Perhaps have repurchase rights only if terminated for cause. Doesn't matter if someone comes in for 8 months but adds value during that period, so vesting concept is eliminated.
Would need IRS to change grant from ordinary income to capital gain type of treatment where taxes are paid when some actual liquidity/transaction occurs.
The second-order option is what makes them valuable. Most startups either grow aggressively during those 4 years or they die. If they fail early, you don't have to sacrifice much salary for the now worthless options. If they are doing well, the options are now worth much more yet you are still only sacrificing the same amount of salary for them.
The problem is that the value of this presents a direct conflict between the company and employee. When the value of the unvested options grow, the company can reduce the unvested amount (or fire them if they don't agree)[1] because it will be disproportionate to the value the employee is providing. Note that they don't actually have to go after the unvested shares to recapture this value. They can go after any other form of compensation they are providing since it will still be more than the employee can get elsewhere. Essentially, this means the employee's upside potential is severely limited. Since the value of a share in a startup is based almost entirely on a massively higher future value, this tremendously reduces the value of typical startup vesting options.
If I worked for a startup I'd want straight equity. Find the value of the common stock and pay 10-30% of my salary in common stock. The amount of shares will float as the value of the company does, but this is required in order to keep incentives aligned. I'll pay the tax out of my salary (at ordinary income rates). If the company succeeds, almost the entire value derived from the equity will still be taxed at capital gains rates.
[1] See Zynga, Skype, and probably many others we never hear about.
I'm seriously considering a profit sharing / options system where options are only vested in quarters that are unprofitable and profit sharing occurs otherwise. I know that this wouldn't be different at all for many start-ups that have little chance of profitability early on, but for those that do it could be a very interesting way to align interest and not screw the employees.
The downside is you have to pony up for the full strike price of all the shares at hiring. Works great if the company valuation is still nominal (ie before a 'valuation event' such as series A, though there may be cap note seed investment already)
One could imagine a company offering a hiring bonus that covers the cost of early exercise (padded for expected tax loss).
Maybe the real problem is this shit is complicated. Then again, we're programmers, right? Don't we do complicated by nature?
I was granted shares (on a vesting schedule) at the time of formation of the company. I paid tax up front on the entire potential share grant when the shares were valued at $0.000001/share, which was a reasonable valuation at the time (very high risk, no tech proof, no demonstrated market, etc.). Although I have a significant # of shares and a significant % of equity in the company, the tax I paid was quite affordable. See 83(b) election.
If it pans out and I sell my equity, I will pay long-term capital gains on the difference between the valuation at the time of my 83(b) election and the sale price. If it doesn't pan out, I'm not exposed to AMT or other tax weirdnesses that other posters have noted. I found this mechanism useful.
Damn complex but worth it to avoid IRS woes.
http://www.mystockoptions.com/faq/index.cfm/catID/B7469ACD-2...
As you say, the big issue with this is paying the exercise price. There's not really any way around that. If you're going to pay your employees extra money to cover the exercise price then you might as well just give them shares instead of options. Another option is to loan the money to employees. I don't know how common that is with startups.
Also, this doesn't really help post A, particularly if you're getting pretty senior and have a bunch of experience. At my last place, I would have had a $50k bill to do an 83b. I could write that check but goddamn is that a lot of cash to part with.
edit: thank you @rosser
This is a great opportunity for Freakonomics to dig into the state of stock options in startups.
When I was in my 20s I was more gullible by all the talk of stock options and becoming a millionaire from them. However I never stopped investing in property and after 10 years I am happy I continued investing into tangible assets that I was in control of. Stock options is a lottery at best. And as you get older, and learn the value of money and your time, you see the opportunity costs clearer.
As a side note, I've been through an IPO and fed all the brain wash leading up to it. Reality is always far from the dream. Many people don't like to talk about their failures only successes hence you hardly ever hear about this.
Now saying all that, there are the minority that strike it rich either by being an early employee of a startup that goes big (small % of something large) or are a founder of a successful startup when the stars align.
Employee compensation in startups will need to change as more folks start to realize the opportunity costs.
My word of advise, invest in yourself and stuff "you are in control of".
When you are not yet cash flow positive as a startup you can give 'bonuses' in options rather than in cash.
I don't know if we could figure out a portion that employees could contribute to additional investment rounds if they wanted to take some money off the table.
We completely decouple performance reviews from compensation. Full stop.
Remember how Facebook was "forced" to go public because so many people owned stock? (http://www.businessinsider.com/why-the-sec-will-force-facebo...). Well, if there's a ten-year exercise window, some of the people will hold their options and not exercise them. My -- albeit limited -- understanding of the situation is that those people are not counted as stockholders. They have options, not stock.
So the ten-year exercise window is also good for the startup, because it delays the time until the startup has to publicly disclose its financials.
Engineers working in Huawei bought shares priced at net asset value with salary or bank loans and gain dividends at a yearly ROI around 17%~75%.
This unique 'communist' capital structure was created due to lack of venture capital and outside financing. It's also an experiment before China fully adopting western style corporation law.
Huawei has a complicated capital structure of founder (1.42%) + employee union (98.58%) which scared many big investors away and hindered it from IPO.
Recently, Huawei adjusted the virtual stock policy to freeze its capital structure because the structure complexity incurred a lot of accusations from the US government and harmed its growth in several major markets.
Alibaba also failed to request change of Hongkong IPO rules to apply employee-partnership to protect its senior employees.
Therefore, employee equity isn't merely about internal profit sharing or fairness at all. Investors or traditional capital markets don't like the 'communist' flavored capital structure.
Employee option is the only viable solution before some one totally disrupt the current capital market.
The issue is that the new startup culture has diversified power and our concept of 'business founder' is out of date. A software company founder is not the analog of a white shoe law firm partner. A personal realtionship with Jeff Bezos isn't why people buy toasters from Amazon or host their SAS on AWS, because it's not some Rolodex full of 30 year of golf course relationships and keeping the jobs of bureaucrats secure that make it rain. "On the internet nobody knows you're a dog.* [1] Or cares that you're a founder.
While I agree with Altman that something needs to change in the direction of making employee's richer ,I think he probably doesn't go far enough. The problem isn't so much tax code as capital structure and the rigidity of company structure that results.
A key hire is a key hire because it changes the company. Ideally, a company would change it's structure to reflect that change. Ideally, a company's capital and corporate structures would be agile as in development.
Key employees are just as exposed to the 'you can be a founder' meme as everyone else, and they're in a better position to pursue it than most. A founder shouldn't expect talent to hang around making them rich. In terms of game theory, I think of it as a founder's dilemma. Altman's piece suggests YC might be seeing it too.
In the current context, a founders's 30% of a $40,000,000 exit is better than even a 1% employe share of a $1,000,000,000 one - much better perhaps than the numbers would suggest because 30% gets a seat at the table, and that old Mark Cuban idea of looking around the table? Well if you're not at the table, the worst case is you're just dead money picking up the tab for someone's boat payment.
And yet YC is forever telling people to focus on "building something people want", above all else. Jessica Livingston just gave an interview listing the things that caused startups to fail; it was a short list, and included "founder breakup" and "failing to build something people want", but not "key engineer leaves".
This squares with ~15 years of experience, mostly in startups, a significant chunk of it in the valley. Recruiting is important, team building is important. But the value of any one "key" developer is lower than your comment makes it out to be. Loss of a key engineer is, for most companies, even in highly technical spaces, easily survivable.
Orthogonally, I'd also suggest you think of a Venn diagram. Draw a circle for "highly effective and appropriately specialized engineer". Now figure out where the circle is for "wants to found a company", and the circle for "intrinsically capable of founding a company", and the circle for "has life circumstances compatible with founding a company".
I get to talk to a lot of developers --- I hire them, at what I believe is a reasonably fast clip, and I work at a consultancy to software development shops --- and I think this notion that everyone wants to found a startup is the product of a lot of HN echo. Most developers do not in fact want to start companies. Starting a company is stressful and, believe it or not, even if you can wangle your way into being a founder many times in a row, it isn't the most reliable path to retiring wealthy.
Now there may be something else that motivated Altman's essay, but it is almost certainly related to YC and the idea of improving employee equity appears to have been seen as a potential solution to some trend in their data. I think that YC came to believe turnover was impacting rates of return, and YC has had to think about ways to mitigate it. They're at the point now where they would have that data and some companies in their portfolio are mature enough where brain drain has a significant impact. For example, they could be running regressions around on former employees of portfolio companies applying to YC against the return rates of investments in the former employers.
There's the pursuit of better returns in there somewhere, and I reserve the right to pull another theory out of my ass at a later date.
Work at a large, established organization and earn your fair market rate at a 40 hour work week, and start your own company on the side if you want to get rich folks. I'd never work for any startup again unless I was the founder.
While I can't prove it, I believe I was once fired just to prevent my options from vesting.
As an employee, you're really better off with zero options and a higher salary 99.9% of the time. But that means the owners have to sell more of their equity to make payroll.
If you want to be a nice guy and keep the early employees eligible for big payouts, take your share of the buyout/IPO and give them bonuses out of that. No one trusts the option plans any more.
I don't see any problem with restricted stock pre series A, when equity is the biggest consideration for employees. As long as financing is notes, the common hasn't yet been priced, so you can just use a very low value.
Willingness to issue refresher grants is easy for CEO and board to change.
I don't think you need to be as open as buffer, but being open with percentage ownership and financials seems obvious.
RSUs with a performance modifier already cover most of this for larger companies. Something like that for startups probably wouldn't work since so much of the risk is company-wide vs. individual.
Founders/management need to be proactive about this. Good school of thought on this is Andy Rachleff of Benchmark / Wealthfront https://blog.wealthfront.com/the-right-way-to-grant-equity-t...
If you trust the founders, they can probably help you up to ~50 person companies like this, but there is an inherent conflict of interest.
[1] http://www.irs.gov/publications/p525/ar02.html#en_US_2013_pu...
I agree that this totally sucks if there is no easy/public market for the stock.
I appreciate that in this case you're turning an asset into a slightly different asset, and that's not like just ordinary appreciation, but I don't know why it really matters. A rule of "capital gains gets charged when you turn an asset into cash" makes sense.
Am I missing something or is this saying people should be offered an 'expected' equal compensation package to what they would get at Google? What would the incentive be? Google is a company with quite a bit of projected longevity, career progression, and very good perks. Why would I choose a startup with inherently greater risk for only the same reward?
Google may not be the best company to pin to, since they offer pretty generous stock grants from what I understand.
I think employees would be more than happy to treat all of this as ordinary income, if that would make it more appealing to the IRS.
What I was proposing was: Hey IRS, if you let me skip the taxes early on, I'll pay a higher rate down the road. I will gladly sacrifice long term upside for short term risk in this particular case (since the odds are already so heavily skewed in the other direction).
I am now working in a series A company, taking 0.13% of the company, 13,000 shares (options). At the other side, Pinterest offers me 30,000 RSUs which I turned down because I thought Pinterest was already a late stage company.
But after I did these researches (including this post), I am wondering if I made a right decision? my 13,000 shares will always be 13,000 shares, no matter how much dilution we have in future, right? so does it mean even if my company grew to the size of Pinterest in future, I still only have that 13,000 shares instead of 30,000 I could get from Pinterest easily with less risk?
Or all late stage startup companies have split their stocks otherwise I don't see how joining a early startup for 13,000 would be any better
This has some tradeoffs, some of them positive, some of them negative, but I am far from an expert I would love some input from somebody who knows more.
It does appear to be vastly simpler for all parties, and completely eliminates any possibility of a tax trap. However it seems to guarantee that you will be paying income tax on the sale, which can be quite sizable. And the specifics of what happens after you leave, voluntarily or otherwise, is incredibly important considering that you are never granted any actual stock.
One of many consequences: an informal agreement, backed by paper or otherwise, to give you compensation in event of an acquisition, where that agreement survives your departure from the firm, is taxable at ordinary income rates on at its fair-market value. This income is realized in advance of the eventual acquisition/sale. That's why startupers care so much about their 83(b) elections, because otherwise that landmine bankrupts people.
Sam is dead-on that the current situation isn't fair and often offers employees little to no information about how the options work.
The 90 days to exercise thing is a real bummer -- for lots of reasons. As Sam says, not every employee is in a position to relinquish that kind of money for the options and taxes. I would say that if you are looking to go someplace else, depending on the size of the company and the situation, it's not out-of-line to try to value the options you won't get to exercise (or even the exercise price) into your new salary. Most companies aren't going to be willing to give you what you need to vest-out upfront, but it is a good way to negotiate either a one-time bonus or higher salary.
When the founders started the company, their equity was pretty much worthless. When employee #5 is hired and gets 0.50% of the company, her equity presumably has some dollar value. Employee #5 gets a better deal than the founders, even though the founders have 100x more equity.
The only thing that matters is the dollar value of the equity at the time it's awarded.
http://www.mbbp.com/resources/business/stock_option_pricing....
[1] modulo accounting tricks
At the rate at which tech-giants are buying tech-startups, we'll end up with very few, very large tech conglomerates. I'm not sure how efficiently things run in these giant companies. More managers = more trouble and less autonomy for the lower levels of the pyramid. Central management and the pyramid are almost like communism, and we know how well that turned out...
Why can't a mid-sized profitable company pay out dividends to stock-holders? Say growth mode for the first 5 years to reach profitability, then start cutting cheques to founders, early employees, and first-round investors. I know losing cash will probably hurt the company momentarily, and stunt the growth of the business, but then you start a second round with a new pool of employee stock and new investors come it to do another 5 years.
Basically, he/she who wants to, can smooth-exit after 5, 10, or 15 years, while keeping the same company envelope, mission, and mid-sized company culture throughout the company's life. I guess this would work only for //very// profitable companies that end up with lots of cash in the bank, but if you haven't build a profitable company after 10 years what's the point?
For a very young startup (even for Series A), the shares are still worth pennies per share, and letting employees pre-exercise the shares not only saves them from AMT but also lets the long term capital gains kick-in sooner.
Only a few startups that I've seen do this, and its really effective specially for employees.
I could be wrong, but I've come to the conclusion that after dilution and taxes, any thing short of a billion dollar exit isn't going to be compensatory for my efforts. I don't know how correct my conclusion is, and whether I should try negotiating for more.
b) Are you learning tech that will set you up to make big money?
c) Are you gaining insight about the industry that will set you up to be a co-founder?
a) It's actually about $15-20 an hour less going off of my last job. I do consider it extra compensation that they are remote friendly, because I got to do some world traveling while working and they were fine with it. But now I'm back home in the Bay (...but also considering traveling again to make it worth my while).
b) Nope, just web stuff I'm already used to doing. The CTO at least is talented so I have learned from him.
c) Potentially. So far no specialized insights into opportunities for new players in the space. Those insights may or may not come.
Why is this the case? If you try to align the interests of the investors with the interests of the founders, you'd find that this would put you at odds with your investors.
A company's total value might be quite a bit higher by having the ability to offer large amounts of employee options (just as an example, the ability to easily hire media personalities with a big followings without breaking your bank), which is good for both the founders and the investors.
I understand the investors are trying to protect themselves from the founders deciding to give a ton of shares to their friends (and then potentially back to the founders, in other ways), but I wonder if there is a better solution to this.
If anyone here has any ideas of how else we can be more friendly to employees with regard to equity I'm all ears.
But what really needs to be addressed is the fact that employee startup equity rarely produces the kind of reward that one would expect it to given the outsize attention that is paid to it. Sam writes:
> As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher.
It's worth testing these numbers against real-world data. For this, I'll use CB Insights' 2013 Global Tech Exits Report[1], which shows that:
1. 1,825 private tech companies exited in 2013.
2. Only 19 of them exited at a $1 billion-plus valuation.
3. 45% of exits were under $50 million, and 72% of exits were under $200 million.
If you assume that the first 10 employees receive 10% of a company's equity, and that each employee in that group receives 1%, a $200 million exit produces up to $2 million before taxes for each of the early employees. A $50 million exit produces $500,000. If you're making $125,000/year as a senior engineer, $500,000 gross after 4 years is the equivalent of what you earned in salary over the past 4 years. That's a nice bonus, but not life-changing wealth. $2 million is nicer, but if you plan to stay in the Bay Area, you might spend half or more of that on a modest house or condo.
Once you factor in the cost of exercising your options, taxes, dilution, liquidation preferences, lack of acceleration and the fact that a good portion of employees leave before fully vesting, you can see that even in a scenario where 10% of the company is given to the first 10 employees, employees aren't likely to see the type of compelling returns that Silicon Valley dreams are made of. Facebook and Twitter-like exits, where thousands of employees become paper millionaires overnight and the earliest gain tens or hundreds of millions of dollars, are the exception, not the rule.
What's worth considering further is the fact that 66% of the companies that exited in 2013 had raised no institutional capital according to CB Insights. So, as a prospective employee, in joining a venture-backed company (or a company coming out of a prominent accelerator), you may be putting yourself at a disadvantage even before you take into account the fact that employee equity is most vulnerable to dilution and liquidation preferences at these companies.
Final note: CB Insights' 2012 Global Tech Exits Report[2] shows similar trends to the 2013 report. In fact, in 2012, over half of exits were under $50 million and 76% of the companies that had an exit had not raised institutional capital.
[1] https://www.cbinsights.com/blog/global-tech-exits-report-201...
[2] https://www.cbinsights.com/blog/tech-mergers-acquisitions-de...
Is it because they:
a) aren't motivated to b) don't know what the potential is there may not even know what is going on. May not even know about YC or VC's etc. c) don't think there is potential there (think it's all over hyped and focuses on a few people who win). d) have family obligations which prevent them from moving to the valley e) Other reasons?
Thoughts?
- Cost of living relative to expected salary is too low.
- Can work for big public companies that pay well in lower-cost areas.
- Weather preferences.
- Family lives thousands of miles away from SF.
- Over 30, still interested in doing technical work.
- Want to own a home, not a millionaire.
- Interested in starting a business, low-cost matters if not going for VC.
- Found interesting & challenging technical work elsewhere.
Etc.
This is kind of like asking why people didn't all move to NYC in the 2000s, or Texas during the oil boom, etc.
Here are my reasons (in order of declining importance):
1) Crazy real estate prices (and as a result higher salaries do not compensate for higher cost of living).
2) Higher taxes. Income, sale, and excise taxes in California are high. In addition to that, federal income tax is higher, because in order to compensate for higher cost of living I need to earn more, which brings me into higher tax bracket.
3) Weather. Too cold for my taste.
a) The compensation game is less ridiculous here. With pressure from the finance industry, all companies (including startups) tend to offer decent salary and don't over-rely on equity compensation.
b) I don't like driving. From my limited experiences, it seems that it's necessary to (occasionally) drive in the Valley.
c) SV seems way over-hyped. Yes, people are building some cool things—but far more people are just making knock-off apps and it's all a bit of a bubble. When the tech bubble pops, SV will be hit the hardest.
d) I don't want to live in a (tech) monoculture. It's interesting interacting with people from other industries and living in a real metropolis.
I live in a small northeast city. I have a 4 bedroom, 2500 ft^2 house that cost about $200k, and is in a great school district. I'll own it outright in about 10 years.
In SV, I'd probably make 2x the salary, but my cost of living would be about 5x. The taxes are probably higher than even New York.
In Pittsburgh the median sale price for a house is $129,000, according to Trulia.
In Palo Alto the median sale price is 17x higher, about $2.2 million, with significant yoy increases: http://www.paloaltoonline.com/news/2013/12/24/real-estate-ma.... "In
If you're making $100K in Pittsburgh, you're doing quite well. And you might want to increase your salary by a tremendous amount, perhaps 5x-10x because obviously some costs don't change, to justify moving to Palo Alto and buying real estate. (Yes, there are other places to live in Silicon Valley, but speaking as a homeowner here, there aren't any that are non-coastal cheap.)
It sucks and doesn't make economic sense, but that is what I observe
I've become a bigger believer in cash. Unless you TRULY believe the vision.
I left and now am getting paid close to triple my old salary with options getting close to 10% in a business model that is far more profitable than the previous. I think lots of people just starting out in the startup scene get taken advantage of and taken for a ride.
This coming from someone who got bent over a barrel.