
Some thoughts on equity compensation - mcgin
http://avc.com/2018/01/some-thoughts-on-equity-compensation/
======
jasode
_> And yet we treat it like something that is non negotiable, _

Sometimes, it's non-negotiable because there's _no money_ to pay Google-style
$300k salaries + benefits.

Fred doesn't make it clear whether he's talking about young startups _with
very little money in the bank_ or a mature 8-year old "startup" like Uber that
raised $22 billion from investors with $6 billion in revenue. If it's a young
2-person startup that just got a modest $120k investment from YCombinator, a
"3rd employee" will not be able to get a $300k salary. The only monetary
recruitment tool left is equity.

Fred is also leaving out the game theory aspects of the equity as a
_deliberate filtering mechanism_ to attract employees aligned with the
founder's vision. Yes, many workers are definitely cynical of startups' self-
aggrandizing _" we're going to change the world"_ so they only see one (and
only one) way to compensate employees: pure 100% cash and fuck off with your
options. An employee certainly has every right to stay rigid to that point of
view. However, it still doesn't change the psychology of founders wanting to
filter out the candidates with a "mercenary" mindset. They often have no money
to pay the mercenaries anyway so they have no choice.

~~~
Yizahi
Well if there is no money then pay with "fair" equity. I.e. you give a person
0.5% of a company and they have that same 0.5% in the next 5, 10, 20 years
etc. No preferential share classes, no dilution, no golden parachutes for
corporate investors, have predefined IPO date (e.g. no later than in 10 years
or something like that), no any of the popular ways to screw employees with
equity/options out of their shares.

~~~
jasode
_> Well if there is no money [...] No preferential share classes_

You're creating a circular contradiction about the money flow.

A founder has no money.

He gets interest from a VC like Sequoia Capital to invest $10 million. The
_standard and non negotiable terms of the deal_ means Sequoia gets
"preferential shares" as a condition of writing a check for $10 million.

One of my potential employees (Yizahi) I'm trying to recruit insists on "no
preferential shares!". Sequoia then says, "Ok, no $10 million deal then. Bye!"

As a result, both the founders and the employees have no working capital to
build a more valuable company.

We can't just shout out _" no preferential shares"_ and _" no dilution"_
without understanding the full ramifications of what that actually means.

~~~
esrauch
Effectively what you are saying is that venture capital funds (correctly)
think that that percentage of shares aren't very valuable when they are equal
preference to the employees. The employee should use exactly the same
evaluation framework: if the VC had nonpreferencial shares they wouldn't be
worth the cash equivalent, so don't value your sweat equity that way either.
Having the lower class of share should be valued even less.

It seems like almost every startup funding system is predicated on early
engineers being decieved about the value of their equity, and when someone
tries to point it out on hn the response is "no venture capital firm will fund
you if your employees aren't deceived about the value of their equity, idiot!"

~~~
jaredhansen
>Effectively what you are saying is that venture capital funds (correctly)
think that percentage of shares aren't very valuable when they are equal
preference to the employees.

That's not quite right - instead, he's implying that vc funds (correctly)
think that the chance that _this company 's shares standing alone will suffice
to return a multiple of the fund_ is low if they are of equal preference to
the employees. That's not the same thing as "not very valuable", and the very
counterintuitiveness of vc math should tell you that an asset a vc may not
want (say, 5% of a company that sells for 75M after 3 years) may in fact be
pretty valuable for the median employee.

>It seems like almost every startup funding system is predicated on early
engineers being decieved about the value of their equity, and when someone
tries to point it out on hn the response is "no venture capital firm will fund
you if your employees aren't deceived about the value of their equity, idiot!"

Not at all - look, there are lots of good resources where you can learn more
about how your equity works, and good founders will probably point you to them
(e.g [0] and [1], although if you need a pointer to this instead of doing the
2-second google search yourself, you're probably not a great startup candidate
anyway). Deception need not _and should not_ enter into it. Not to say that
there aren't scammy founders, but it's not best practice, and I don't believe
Fred Wilson or most other reputable VCs would claim otherwise.

[0] [https://blog.dweek.ly/introduction-to-stock-options-
startup-...](https://blog.dweek.ly/introduction-to-stock-options-startup-
founder-entrepreneur-employee/) [1] [https://foundersgrid.com/employee-
equity/](https://foundersgrid.com/employee-equity/) ...

~~~
esrauch
I don't believe VC math actually has the property you are saying: the thing
about most preferred shares isn't just protection from routine dilution (which
makes you more likely to 'win big' if the company becomes a unicorn), they
also tend to be much less likely to receive actually zero (better protection
from recap), right?

The idea that regular employees are somehow better served by shares that
rational investors won't touch takes a lot of justification.

~~~
jasode
_> most preferred shares isn't just protection from routine dilution_

There's some misinformation there. Preferred shares do not have protection
from "routine dilution". In fact, dilution is the very mechanism to _sell more
equity_ to subsequent investors at a higher price. (E.g. When Accel Partners
invested $12 million for 15% equity of Facebook in 2005, they _got diluted_
when Microsoft later invested $240 million to buy 1.6% equity in 2007.)

The "anti-dilution" provision that VCs get is not for "routine dilution".
Instead, it's for a really bad event called a "down round"[1] where the next
investor pays less than the current investor. We could ask The Universe why
employees don't get the same anti-dilution protection but I think it's a moot
point... If the company is getting _devalued_ , employees are gonna worry way
more about finding a better job somewhere else instead of staying employed on
a sinking ship. In other words, a "down round anti-dilution" protection for
employees is kind of mathematically pointless.

On the other hand, the type of favorable "anti dilution" for employees that
most people are thinking about such as as a 1% grant at hire, and staying at
1% through all subsequent positive "up rounds", and finally at IPO -- is
something even VCs don't get. _Nobody has that type of dilution protection._
Not the founders, nor angels, nor any investors. The closest approximation
would be a provision for VCs to _pay for more shares_ to keep their %
ownership the same. That's more like "pay to play" rather than "anti
dilution". In any case, people don't need that type of dilution protection
because what matters is the #_of_shares_ multiplied by _price_.

[1] [https://www.feld.com/archives/2005/03/term-sheet-anti-
diluti...](https://www.feld.com/archives/2005/03/term-sheet-anti-
dilution.html)

------
tptacek
This is why we stopped giving employees equity pretty early on. We got to a
pretty decent headcount before we sold (probably above the median for post-B-
round YC companies). We just paid cash and bonus.

I don't often like Fred Wilson's compensation writing, but here I think he has
the problem basically nailed down: employees (rationally) don't prize equity,
and giving it to every employee is in the long run extremely expensive.

Two thoughts:

You don't have to give shares to every employee to give it to some of them.
The first shares I ever got that were worth much (Secure Networks, back in
1998) were shares I had to opt in to, at the cost of some salary. I had
coworkers who chose not to do that. We were all generally happy with the
outcome.

People on this thread are making comparisons to 300k/yr Google salaries. For
journeyman developers in SFBA, this is probably a reasonable comparison? (I
mean, the median SFBA developer isn't making that, but you could argue that's
because they're being underpriced in the market by the practice of issuing
shares that will never be worth anything). But for employers, it's a pretty
silly comparison. If you're a startup paying 300k/yr to someone who does work
a CS graduate out of school can even theoretically do, you're doing it very
wrong. You might have to adjust your hiring filters to get your cash
compensation down to a reasonable numbers, but you should do that anyways,
because filters that keep you stuck in the "competing with 300k/yr salaries"
zone are, for almost every startup, a vanity.

~~~
IronKettle
> shares I had to opt in to, at the cost of some salary.

I think this is a fair way to approach the situation.

> People on this thread are making comparisons to 300k/yr Google salaries. ...
> But for employers, it's a pretty silly comparison.

Why though? You're competing with them, whether you like it or not.
AmaGooFaceAppleSoft hired 45% (including those going on to grad school, etc)
of my graduating class, and I didn't go to Stanford. No joke, it was really
45%. These companies are vacuuming up everyone, and some of them are
shockingly easy to get an offer from.

Sure, they didn't get paid 300k/yr to start. But with how much the equity has
appreciated since then, it's probably not that far off.

So that leaves you with the remaining 25% who didn't get hired/didn't want to
work at at one of those companies/didn't go to grad school, and you're
competing with every other startup for them - including the larger, more
established ones who can reasonably say they won't disappear tomorrow (e.g.
AirBnB).

~~~
tptacek
No, you're not competing with them. AmaGooBookSoft hires, to a first
approximation, only pedigreed developers with their AKC papers in hand.
They're competing for a limited supply of those developers.

But, in fact, a mutt developer you rescue from the dev pound catches a ball
just as well, and may in fact be more healthy than the purebreds that Google
is hiring.

You know this has to be true, because outside of AmaGooBookSoft (actually:
pretty much just GooBook), nobody makes those wages anyways. Even accounting
for the (wildly optimistic) company projections for equity value.

~~~
mbesto
> No, you're not competing with them.

Sorry, but I have first hand experience on multiple occasions in the bay area
that say otherwise. I'll take my anecdata and disprove your anecdata.

As a long time HN'r myself, I really appreciate the comments you add to
discussions, but telling people "you are not X" will make it difficult to get
your point across. Not to mention, you don't even live/work here. How are you
so comfortable postulating on something you don't have direct experience with?

~~~
user5994461
They don't compete. Good developers who can get a job at the big 4 get a job
at the big 4.

Small companies get people who couldn't go to Google or who are ignorant about
compensation and perks.

Eventually, people grow up and learn, then they flee to the big 4 if they can.

~~~
pcwalton
Oh, come on. This kind of silly overgeneralization is more than a little bit
insulting to me, my coworkers, and a heck of a lot of other people.

I could have gone to the "big four" a long time ago, and I turned them down.
I've never regretted my decision. I've done incredibly fulfilling work here
and couldn't imagine working with a more talented group.

------
IronKettle
Ehhh. A few interesting thoughts though not necessarily original, the "your
equity is worth 0" mantra has been repeated enough that it's not ground-
breaking.

It _maybe_ makes sense for huge, publicly traded companies like Apple (who
could easily afford to just pay their employees enough to offset the equity
loss and then some), but of course there's the whole idea that equity
compensation aligns incentives for employees and the business.

> “You people in tech are crazy. I pay my employees handsomely in cash and I
> keep all of the equity for myself.”

This would be catastrophic for the startup industry:

* Why would I ever work for a company that has huge downsides (chance of failure, lack of resources, etc.) when I don't get to enjoy any of the potential upside

* How many startups can afford to pay their employees "handsomely" (relative to what they could be earning elsewhere)?

The only way I imagine a 0-equity world working is one where VCs cough up a
ton more money to compensate startup employees handsomely. And to be fair to
Fred, maybe that's what he's suggesting (spending more money now to retain
more equity later). But I didn't see that stated anywhere.

~~~
sunir
I don't understand one point you raised. What downside risk is there to the
employee if a company fails? The only risk is the cost of finding a new job
which is offset by latitude in experience gained.

Why would you work for money instead of equity at a high risk venture? Because
paying in equity pushes the risk onto the employee. Paying in cash takes the
risk out. You are paid in full up front for your work. You'd take the job
because it is paying you.

Startups pay in equity because they don't have cash.

Since then the lottery ticket aspect had taken grip with the labor market.
However those people who view options as lottery tickets I find are subpar.
Trend followers mostly. Those chasing Klondike gold.

~~~
IronKettle
> What downside risk is there to the employee if a company fails?

Sorry to be snippy, but: Come on man, do I really need to explain this one?
Sudden loss of employment is incredibly disruptive at best, and for many it's
a significant financial hardship.

> You'd take the job because it is paying you.

So is Amazon. And they're offering Amazon equity, which is killing it
recently. So, again, why would I take a job at a high risk venture if there's
no potential lottery ticket?

> Startups pay in equity because they don't have cash.

Yeah, exactly. Startups can't afford to compete with Amazon on salary.

> Those chasing Klondike gold.

Come on, as opposed to most startup founders? Anyone who has taken even a seed
round is chasing klondike gold as well.

~~~
mrgriscom
> Sorry to be snippy, but: Come on man, do I really need to explain this one?
> Sudden loss of employment is incredibly disruptive at best, and for many
> it's a significant financial hardship.

If you're getting paid handsomely in cash, you should be able to weather that
interruption.

> So is Amazon. And they're offering Amazon equity, which is killing it
> recently. So, again, why would I take a job at a high risk venture if
> there's no potential lottery ticket?

Amazon equity is publicly traded; you can buy as much of it as you want with
any salary.

~~~
IronKettle
> If you're getting paid handsomely in cash, you should be able to weather
> that interruption.

Two glaring issues:

1) What people _should do_ and what _they actually do_ are two different
things. People _should_ eat sensible portions of healthful food. And yet, we
have an obesity epidemic.

Saying people (even among those with high salaries) _should_ be able to
weather an interruption isn't very helpful when in practice many can't [1].

2) Which startups can afford to pay people handsomely in cash? (early)
Startups offer equity to employees in large part because they can't afford to
compete on salary.

> Amazon equity is publicly traded; you can buy as much of it as you want with
> any salary.

It's on top of Amazon's fairly generous salaries. The comparison was between
being given Amazon equity, which is obviously worth something, vs. a private
company's equity which is almost always worthless.

Which non-unicorn startup is offering $250K+ a year in salary and bonus for a
plain old software engineer?

1: [https://qz.com/520414/the-high-earning-poor/](https://qz.com/520414/the-
high-earning-poor/)

------
nwenzel
When people talk about startups and equity, they often talk about the “risk”
of joining a startup. For me, as a founder, the equity portion of a comp
package isn’t about the risk. I’m curious to know what HNers (often with very
passionate thoughts on the topic) think of my theory.

There is risk at companies of all sizes. Also, the idea of a single career in
your lifetime isn’t a reality, so the “risk” of a losing a job is really the
risk of losing it without notice. Compensation for that risk would be
something like one month of pay, not illiquid certificates that might or might
not become cash someday.

Employees can also change jobs voluntarily. But the idea that their employer
should get a percent of their future earnings as compensation for that risk
would be ridiculous.

I believe equity comp is because employees have two jobs: 1) execute on their
day job, 2) build the systems, processes, culture, and institutional norms of
the company. Basically, the equity component is added to the cash component
because building a company takes long-term thinking and because it’s a ton of
work.

I’m curious to know if others think about equity comp having a purpose other
than to offset risk. Thanks!

~~~
saas_co_de
From an economic perspective I don't think equity can be a very strong
motivation for individuals.

As an individual your work may be totally optimal and yet the equity may be
worthless for a thousand reasons that have nothing to do with your work.
Consequently, a rational person will not see equity as being much of an
incentive.

If you take that a step further you are giving up equity in your company but
all of the smart people are valuing it at zero when they are assessing your
comp offers so you are giving it away for nothing in return. Since this
employee equity didn't create any value for the company it is only rational
that if your company becomes successful you make sure the employees don't
really get anything out of it, which is usually what happens.

------
philipodonnell
Many of these comments seem to instinctively take the side of the VC. "I had
to put in more money to avoid being diluted so why shouldn't everyone with
shares have to do that in each round?"

I mean, as long as the employees are there, they are getting paid the same
amount they started with, which has some non-zero discount due to that initial
equity grant, so they are technically 'paying' by continuing at the old
salary. Why wouldn't an early employee compensation package include being
issued shares in each round to maintain their undiluted amount, in return for
continuing to work there at a discounted salary?

Not everyone contributes with cash, and cash is not special these days.

------
barrkel
What about ownership over value creation? If you're in a creative industry -
and I consider software a creative industry - giving away your creations for a
wage is psychically harmful. If you're genuinely creating something of value,
you want to own some fraction of its value - its revenue-generating value, its
future cash flow.

The other thing is that options suck. Options have so many conditions, vesting
schedules, cliffs, expiry dates, negative tax repercussions... options are not
equity. Options don't feel like ownership. Options are lottery tickets that
might pay out, maybe. If you agree to be a wage slave for long enough, to give
away all the value you create, see the big sales land and the annual recurring
revenue build up, you might, one day, own a small slice of that cash stream.
Maybe.

~~~
ProblemFactory
> If you're in a creative industry - and I consider software a creative
> industry - giving away your creations for a wage is psychically harmful. If
> you're genuinely creating something of value, you want to own some fraction
> of its value - its revenue-generating value, its future cash flow.

If you work as a freelancer or partner in a small agency that does software
development for non-technical clients, then keeping ownership and reselling
your work is often possible. You can negotiate to sell the client a non-
exclusive license.

But it's not realistically possible for an individual contributor at a medium
to large tech company. There are too many people involved with each project or
product, and no part of it is individually useful. You can't resell a git
patch that fixes a bug in an existing codebase.

~~~
barrkel
_You can 't resell a git patch that fixes a bug in an existing codebase._

This isn't an act of creation, usually. I'm thinking more around creating UI
components, or developing libraries that add whole new facets of
functionality, or enable new ways of working with data. Things that could be
reused elsewhere, or enable higher-level programming of application features.

 _But it 's not realistically possible for an individual contributor at a
medium to large tech company_

I wouldn't agree to being an individual contributor on a wage-only basis, at
this point, without major compensation. A possible exception would be
something vocational: going back to working on developer tools, perhaps.

------
j_m_b
Equity in a startup for an employee is worthless. The only kind of equity
that's worth anything are stock options for companies that are actually being
traded on the stock market. However, those companies don't actually need to
give you equity as part of a compensation package... they can pay you for your
work. In that case, you can decide for yourself to purchase "equity" if you
truly think it is that valuable.

~~~
austenallred
I have a dozen friends that are extraordinarily rich because of this
“worthless” equity.

~~~
alien_at_work
Assuming you're telling the truth, these are called "outliers". You know a
dozen people who won a lottery ticket. So what. The math still holds: a
lottery ticket is a negative investment and startup equity is worthless.

~~~
austenallred
Not the majority, but not an outlier either. If it were actually a lottery
ticket it would be impossible for me to know multiple people that are rich as
a result. I don’t think it’s as rare as you seem to think - a Facebook creates
thousands of millionaires and a handful of billionaires. A lot of companies
you’ve never heard of made all their employees rich. The odds aren’t good but
it’s by no means a lottery, either.

Startup equity is likely worth nothing, but there’s a small chance it’s worth
an extraordinary amount. That’s not “worthless.”

~~~
pja
By definition, your friends are likely to be concentrated in specific sub-
groups (that’s how friend networks work). So if you know one Facebook
millionaire, the likelihood is that you know a bunch of them.

By contrast, I don’t know any Facebook millionaires. Nor do lots & lots of
other people, even within the Tech industry.

You can't generalise from your personal experience to the "average" experience
- 'Facebook millionaires' are not randomly distributed, but clustered
together: social graphs are not randomised.

~~~
eldavido
I think this is true, but I draw a different conclusion: talking about
industry-wide "Averages" is a complete waste of time.

It's sort of like talking about "the housing market" vs. the Houston market,
Chicago market, SF market, etc.

There is no "average experience" just like there's no "average housing
market". That level of aggregation is just meaningless. It's much better to
consider one's circumstances and think about people in your situation, their
odds, vs. some meaningless aggregate.

------
dsugarman
I agree that it is very difficult to understand equity comp and probably only
moves the needle for high level execs when you are recruiting but it's not all
about recruiting it's about performance and retention. I want employees to
feel ownership and the only way to do that is to give it to them. I want them
to understand that they have this asset that their hard work directly affects,
I want them to be aligned with the company not just their own career path.

~~~
qaq
The whole industry is pretty simple top VC firms make a fairly large number of
carefully screened deals to make sure they capture as many Unicorns as
possible since without Unicorns the VC game is a big money looser. Of those
companies that do get funded by top VCs and do not become unicorns very few
will have meaningfull exists for employees. To mask this simple fact there
exists a fairly powerful PR machine that feeds Startup entrepreneurs which in
turn feed the same regurgitated slogans to their employees. So translating "I
want employees to feel ownership and the only way to do that is to give it to
them. I want them to understand that they have this asset that their hard work
directly affects" in reality translates to I want you to imagine that for some
magical reason you can pick a Unicorn even though top tier VC firms stuffed by
brilliant people doing it full time get it right at best about 1 in 100 times?
So even if your hypothetical employee is as good at picking winners as a top
VC the actual value of their option is in reality 1/100th of the imaginary
value at your big exit given the odds (and this is only if they are as good at
picking the company as a top VC).

------
sulam
If Fred’s companies want to compensate me without equity, I’m happy to
consider it. At this stage of my career my annual compensation is approaching
7 figures, balanced however you want between bonus (with reasonable targets),
equity (properly risk-adjusted) and cash twice a month. I’d even be willing to
consider deferred compensation properly escrowed with the time value of money
factored in.

Somehow, though, I don’t think Fred’s companies are going to be willing to pay
me what I can demonstrate is my current income (via IRS filings if necessary)
without equity being a component of the compensation, in fact without it being
the majority of the overall package. I’m okay with that, because I only work
for companies where I strongly believe in the product and the team.

This may all sound fairly entitled, but if you’re as lucky in your career as
I’ve been, your job has an opportunity cost that is measured in things like
spending less time on my own projects, my family, and general self-improvement
—- and this opportunity cost is pretty high.

~~~
austenallred
I can’t imagine any scenario that makes sense for you to go work at an early
stage startup. That said, it’s fair to say you’re not at the average level of
compensation. Simply put, your opportunity cost is _way_ too high for you to
take risks.

~~~
sulam
Yeah, you’re probably right. I stay involved with the startup universe by
advising CTOs. It’s fun and helps me appreciate my life.

I _am_ considering startups for the future, but the options I’m thinking about
will be things I need to see exist in the world. I’m direly concerned about
climate change, and I’ve come to the conclusion that carbon capture is the
only thing that is going to save us from species suicide. Current carbon
capture technology doesn’t scale up very well, and with only one exception
that I’ve found, only works when you put it in a power plant. I’m spending a
lot of spare time right now investigating alternative approaches and what
skills I need to pick up to do something meaningful here.

------
3pt14159
I wrote this very thing to an investor once. Norms aside, due to information
asymmetry the only companies worth getting equity from are the ones not
including equity in an offer. For every one Shopify there are a hundred
weasels or failures. You get much better people by just offering higher cash
and they can buy into your round if they really, really want to.

~~~
krallja
> and they can buy into your round

That’s a good way to ensure you’re only hiring millionaires. Accredited
investors must have a million dollars in net assets, or income over $200,000
($300,000 married) per year.

~~~
3pt14159
Not if they're personal connections. I've never seen it as a problem.

~~~
krallja
I think you can't have it both ways. Either you hire only accredited investors
(and personal connections), or the job candidates have no legal way to acquire
equity.

------
yomly
Personally, I'm not interested in working for a company who _doesn 't_ pay out
some form of equity.

We live in a world which skews towards wealth - if you don't have wealth
you're slowly falling behind those who do. So why the hell do I want to take
my hard-earned skills to generate wealth for someone who doesn't want to share
some of it?

What if the company goes down and my equity is worth 0? Well that's life, at
least I threw in my lot someone I chose to back.

PS offering < 1% to a "senior" hire does not constitute sharing.

------
wastedhours
I took options in place of a jump in salary between jobs - took a 10% pay cut,
was offered a few % in options, and I felt comfortable with that as the
bargain. If you're contemplating a shift in salary that would change your
lifestyle though, that seems like a bad deal.

The cash, at the end of the day, is a tool - if the bargain you're going for
is a step backward in your quality of life, that seems like a poor decision
unless you truly are drinking the Kool-Aid.

That being said, I left before any of mine vested, so I just had a pay cut and
no real benefit from it other than the experience.

------
tomc1985
Alternative Minimum Tax on exercise on ISOs is 100% grade-A bullshit. Special
incentive stock options with tax benefits negated almost completely by AMT?
And the only real way to deal with this tax is to either hold til a
liquidation event or sell it to one of these equity collector firms for
pennies on the dollar?

The ONE good thing Trump & congress could have done this year was eliminate
AMT, and they didn't.

For the average Joe equity isn't much better than a lottery ticket. Equity is
a LIE. Give me $$$$$$$

~~~
teej
I agree with you that AMT for ISO exercise is bullshit but they did
significantly change the rules. My AMT tax burden for exercising this year is
half what it would have been under the old rules.

~~~
tomc1985
That's good to know. I need to find a good tax lawyer...

------
seajosh
Always always always take cash over equity. Equity is a lottery ticket and
needs to be treated as such.

------
imsofuture
Always be suspicious of someone telling you that something isn't worth very
much, so they might as well just keep it for themselves.

Sorry, but that's all this boils down to.

------
jacknews
“You people in tech are crazy. I pay my employees handsomely in cash and I
keep all of the equity for myself.”

Ha, yeah, I'll bet!

It's certainly not easy or risk free to deal with equity, but to me, some kind
of stake in the company is the only morally justifiable way - if people help
to build the business, they should share in the success, and even generous
salary will never reflect that - you'll never get rich on a salary.

~~~
alien_at_work
> you'll never get rich on a salary.

Actually, if you get a nice salary and live below it, you can take the extra
money and invest in an index fund. That will get you rich much, _much_ faster
than chasing lotto tickets. Especially since startups usually have salaries so
awful you can't possible do a start up _and_ invest in sensible investments.

~~~
jacknews
In which case you're really getting rich off ownership of companies in the
index.

~~~
alien_at_work
My point is more that investing in _a_ company is a bad investment strategy.
There are no fund managers with such a strategy. Any fundamentals strategy
will rely on diversification. And a retail trader like us can't diversify
cheaper than with an index fund/ETF.

Having that single company investment _also_ be the company you work for...
and taking a lower salary to be able to make this awful bet... well, you
_deserve_ to lose big for behaving so financially irrational.

------
ealexhudson
One thing worth thinking about: after a couple of years of issuing options,
people start being able to vest, and their presence (or not) on the cap table
is a pretty interesting signal about people's expectations of the business.
Especially if you have a few people leaving, with their options lapsing: to
me, that's a big red flag you wouldn't otherwise have.

I think we're going to start seeing fewer (and worse) options schemes in tech,
but I don't think it's going to be anything to do with how attractive or not
they are to potential employees. It's going to be because founders and
investors find them less attractive to give out (for reasons like the above).

------
htormey
The big problem I have with startup equity compensation these days is the time
it takes to get to get to liquidity.

Going from founding to an IPO takes what, 8-10 years? Even assuming things go
that well if your equity doesn’t have terms like early excercise or a long
time to decide if you want to exercise it’s not a good deal. It’s easy to get
locked into working with below market compensation in scenarios like that.

Also very few companies allow for things like secondary markets.

It’s going to be interesting to see how or rather if this gets addressed in
the coming years.

~~~
jdc0589
> Going from founding to an IPO takes what, 8-10 years?

probably, but an IPO is not the only event that triggers an equity payout.
Getting sold/acquired will also trigger an equity payout, and those are much
more common events than an IPO.

~~~
htormey
I think exit times are taking longer across the board, especially compared to
earlier periods in SV history:

[http://www.angelblog.net/Venture_Capital_Exit_Times.html](http://www.angelblog.net/Venture_Capital_Exit_Times.html)

------
bitwize
The analogy that I use is this: equity is Bison dollars. You could trade in
your equity for a princely sum _if_ the founders' world-domination plans go
off without a hitch, but a) that's a big if; b) in the meantime, you can't eat
those stocks, nor will your landlord accept them as rent.

Which is why anyone who offers to pay me in equity instead of salary gets a
polite fuck you, and I would only accept partial equity compensation if the
salary part is sufficient to meet all my living expenses and then some.

------
alexandercrohde
Maybe the answer is more transparency on the market value of the options. For
example, if I get X options (common stock), it'd be nice to know the market
value of those options [as of last funding round].

I could then divide by 4 (vesting), and know this is an upper-cap on their
worth (because preferred vs common, dilution, strike price, liquidation
preferences, lockout period).

So to repeat, if you consider it a problem that engineers don't value options,
perhaps give them all the relevant information they need to value those
shares.

~~~
teej
If you are entertaining an offer at a company, they should give you these
numbers without hesitation. If they don’t, refuse the offer. I have never had
an issue getting details on equity, funding rounds, and valuation.

------
keeptrying
In India, startups pay a much higher salary than corporate jobs along with
some equity.

Given the minisicule number of startups that make it, I think this is a much
more sensible option for engineers. Especially ones who want to start their
own companies - as they save much more in the process.

------
cletus
This is an odd post because Fred closes saying:

> I don’t have any specific recommendations to make on this topic except that
> Boards should be thinking way more deeply and creatively about this issue
> than we are.

Equity compensation came about as a way of paying employees when cash was
tight. It also tends to (arguably) align incentives between the company and
the employee in the long term.

Now equity compensation exists largely because the likes of FAAMG pay senior
engineers $300k+ in total comp and, again, smaller startups just can't afford
that kind of cash outlay.

So what "creative" way is going to "solve" that problem (from a VC's
perspective)?

Consider if you had 50 engineers that you pay $100k + equity to and these are
60% of your costs. Your burn rate is just north of $8M/year. Now if those
engineers were paid $300k/year instead and your other costs didn't change,
your burn rate is now north of $18M/year.

Equity compensation is your way of lowering expenses and reducing your burn
rate. That extra $10M/year will mean you'll need bigger funding rounds more
often and then you end up diluting your stock to investors rather than
employees. Is this better? How?

Another point: when it comes to mature companies (ie publicly listed), equity
is a pretty tax effective way to pay someone.

Say an engineer joins an FAAMG company for $170k base salary, target bonus of
$30k and $400k in RSUs (4 year vest, 1 year cliff). That's notional total comp
of $300k. More when you consider annual refresh grants. Assuming $100k refresh
grants, total comp is pushing $400k by year 4.

But there is risk attached to that, namely that the stock could go down in
value. If that didn't interest you, that same engineer could go work for
Netflix and just get a $300-350k salary with no equity (which is fine).

But if that stock goes up 20% before the cliff, you've made an extra $80k over
4 years without doing anything.

If you approach the problem from the other way, imagine you wanted to make a
$400k investment in an FAAMG company. You have some options that include:

1\. $400k in after-tax money invested

2\. $150k after-tax plus $250k on margin

3\. $400k in pre-tax money in a 401k

(1) is expensive, (2) is less expensive but riskier (ie margin calls) and (3)
is really putting a lot of eggs in one basket plus you'd need a substantial
amount of retirement savings even to consider that option.

I bring this up because in the all-cash case (eg Netflix), if you do want to
invest in your employer's stock this way, it's really expensive to do. Those
who say you can just take the cash and buy shares miss or gloss over the
leverage you can obtain from an initial stock grant. If you plot even modest
stock growth, you'll quickly find the $400k grant with $300k total comp will
quickly outpace the guy whose earning $300k (or even $350k) per year as they
have to pay taxes on that money then invest it.

~~~
ThrustVectoring
The analysis is also missing the option value in being able to decide whether
to extend or cut short your employment based on the value of your unvested
RSUs.

Suppose you get paid $100k in RSUs. If the value declines by half to $50k, you
can try to job-hop to another place where you get a different RSU grant that's
worth $100k again. If the value doubles instead to $200k, you can park your
butt and vest the whole balance of RSUs instead.

This is true even with selling your employer's shares immediately on vesting
(which you absolutely should do).

------
dawhizkid
With crypto I think the math becomes even worse for startup options...would be
interesting to see numbers around employees leaving because of crypto.

Brightside is that if the trend continues then perhaps it will force the
entire startup/VC ecosystem to rethink options and/or create more guarantees
around liquidity that isn't so completely up in the air.

------
jmull
That’s fine, but then don’t expect your employees to act like they have a
stake in your company’s future. Most will be doing what’s explicitly required
of them but resist much more, whether you need it to be successful or not.
When things get tough they’ll back off and start looking for a new job just
when you need them to step up.

~~~
s73ver_
Which is also going to happen if you do give them equity. Most people these
days know that equity trends toward being worthless anyway, either through the
company going under or the equity being diluted to hell and back.

------
regularfry
Some numbers (because who doesn't like numbers).

Let's say (VERY F'ING HYPOTHETICALLY) that I could walk into a $300k Google
job. You as a startup can offer me $150k+equity, and let's say there's a 4
year vesting period on those options. Straight out of the gate we can see that
the bare minimum those options have to be worth to make that transaction
worthwhile is $600k (ignoring tax, 'cos I'm not looking that up). Time value
of money increases that to, let's say, $666k.

So far, so good. Now, what are the odds of getting that payout? If you went
round that cycle 10 times, how many times would it pay out? 1? 2? Let's be
_very, extremely, remarkably, and irrationally charitable_ and say that every
other startup lasts 4 years and pays out, and the rest go pop. That means we
need to double our baseline to $1.3M to compensate.

For going into any of these deals to be rational, to balance the risk each one
needs to be credibly offering to make you a millionaire.

~~~
dwaltrip
Some people don't want to work for a big corp. This preference changes the
analysis significantly.

~~~
regularfry
Sure. That's outside the realms of a discussion of whether equity is
reasonable compensation for a lowered salary, though - "not working for
bigcorp" is a separate part of the compensation package.

I'm not saying that anyone's _wrong_ for choosing to work for a startup. I'm
just saying that it might not be rational. We're human, so that's fine. We're
allowed to have non-economic value systems. But anyone walking into a job
where options are part of the compensation ought to understand how the company
views what it is offering.

~~~
dwaltrip
I think it's misguided to label non-economic factors as irrelevant to a
rational consideration. Humans aren't economic robots. Money is an
abstraction, a very important one, but not all-encompassing.

Perhaps your comment came with an implied "assuming no preference in firm
size". That's fine, but a large number of people don't fall into that
category, and so they will need to rationally modify the analysis.

------
brndnmtthws
Most VCs think about equity compensation like this: "How can we complicate the
process, and use the most opaque language in order to screw the lower level
employees and avoid diluting our holdings?"

