
Big IPO, Tiny Payout for Many Startup Workers (2015) - patmcguire
https://www.bloomberg.com/news/articles/2015-12-17/big-ipo-tiny-payout-for-many-startup-workers
======
wowdidntreal
Why give employees big payouts, when they'll work just as hard for mere
unsubstantiated promises of such payouts?

The article shows how most employees are too occupied counting their imaginary
fortunes to seek the most basic grasp of how their options really work.

The race for riches in early-stage startups has become a gold-rush, and now
that we are clearly after the peak, most employees are chasing the dreams of
yesterday's big-payoff exits, failing to look around and notice that these
were rare even back in the day, and now they hardly ever happen at all.

Investors got savvy about protecting their investment, while employees are
just as clueless as ever, so even when big IPOs do rarely happen, the
employees see very little profit.

This works very well for the investors. The downside is the erosion of equity
as an incentive, but even more so - any sense of working towards a common goal
and shared success, which is what startups are supposed to be about.

This will hurt the entire industry. On an individual level, if you accept
substantially lower pay, for a tiny unprotected bit of equity and someone's
unsubstantiated promises that it will be "one day" earn you millions, then you
are a fool.

~~~
maxxxxx
Sometimes I admire investment banks. They screw over anybody else who doesn't
work at their company but within the company the pay seems really generous for
everybody. Tech companies could easily pay much, much more and still make a
lot of money for investors. Why are bankers so highly paid? Is it because they
are asking for more money?

~~~
mavelikara
> Why are bankers so highly paid?

The skills acquired at their day jobs also enable them to be much more
financially savvy than tech workers. Tech workers, I imagine, get better work
computers for similar reasons.

~~~
brilliantcode
Excel is such a highly valued skill compared to machine learning in the mind
of bankers, they think their job can't be replaced by AI as did the Luddites
of the 18th century when industrial revolution took over.

~~~
nylonstrung
Then explain why we've seen almost no automation of the workflow of investment
bankers of the last 15 years even though it is a massive payroll expense in
banks that are aggressively cutting headcount and automating back office
functions.

It's not a job that is easily displaced by code.

~~~
brilliantcode
who says the next 15 years won't see the automation of investment bankers?
We've only recently started seeing the rise of deep learning to reach new
heights like AlphaGo, put Picasso to shame, drive cars, replace managers in
Japanese factories, mimic human voice, predict conversion and see patterns &
deep links unclear to the human.

I don't see why we can't automate the workflow of coke snorting gordon gekko
wannabe fuckboys on wall street in the next 15 years as will a large chunk of
professional careers. To boot, we see lot of the floor trading becoming
automated as a result of the innovation we had in the past 15 years.

Luddites of the 21st century will hit the mid to lower upper class hard, I'd
love to work on such problems.

~~~
nylonstrung
It's going to be one of the last jobs to be automated because it has a massive
amount of client facing/relationship work and despite your disdain for it, the
fact is that it is more complex and demanding than the vast majority of white
collar jobs out there. It also is an extremely small industry in terms of
actual headcount, probably 150K worldwide

We've had plenty of stuff like NLP for 10-Ks and management calls but the job
has been relatively unchanged overtime save for the introduction of CapIQ,
Bloomberg and Excel. Which isn't to say that it can't change, but that it
probably won't happen anytime soon.

------
katzgrau
If you're in it for the big windfall, consider bootstrapping your own company.

It's hard, it's depressing, it's exciting, it's terrifying, and it's
rewarding. Learn to set goals and execute, sell a product, deal with happy and
angry customers, build partnerships, market, price, negotiate, and more.

You'll get much more out of it than working for someone else. When you work
for someone else, someone else's dreams are the priority.

~~~
ithinkinstereo
Now that we're past peak VC-backed startups I've noticed a trend on HN pushing
the benefits of the bootstrap path.

There are many positives, true. But the negatives should not be understated.
If you don't fail outright, the most common outcome from bootstrapping is
often worse than raising VC or working for a VC-backed startup. That is,
you'll work years and years and years with lower pay, work more hours, and
endure a hell of a lot more stress only to fizzle out at the end (also without
a big payout).

Try to go back to corporate after wasting the best years of your life
bootstrapping your small-name, small-reputation startup for 5-10 years. And if
you do go back to corporate, watch them lowball you on salary and position.

If you do succeed, yes the payout is greater. But chances of a big exit are
rare in the VC-backed world as is, and imo, even rarer in the bootstrapped
world.

This is the negative side of bootstrapping that is rarely mentioned. YMMV of
course.

~~~
brilliantcode
MRR of $100,000 USD from a bootstrapped business I think still beats the
elusive payoff that everyone is gunning for-it tends to not happen (that's why
there's relatively few compared to failures) and VC's really don't like to
talk about it. They can afford it because the have the capital and it doesn't
cost time so they get away with it but you can't.

The marginal returns diminish after around 70,000 USD / year, the only real
winner is VC who will have their eggs in multiple baskets with only their
capital at stake which won't break them. There's all sort of fancy ways to
cover their ass, all at the expense of you, the founder and your employees who
have traded the most valuable commodity, time.

It's clear who values their time more than the founder & employees.
Bootstrapping means you control the destiny and a higher chance to pocket more
than a C-Suite's salary _combined_. So you make 100k every month from your
bootstrapped business but you never IPO, you can buy the world's smallest
violin. Operating at break even to meet your VC's needs for a quick IPO is a
fool's game, your life is now a financial speculation vehicle for the rich.

 _FUCK. THAT. SHIT._

~~~
mjolk
> It's clear who values their time more than the founder & employees.
> Bootstrapping means you control the destiny and a higher chance to pocket
> more than a C-Suite's salary combined. So you make 100k every month from
> your bootstrapped business but you never IPO, you can buy the world's
> smallest violin.

As someone full-time bootstrapping, and who will launch having bootstrapped,
my take-away is that I wish I took seed money to be able to pay a couple
people to go on this journey with me. I'm a solo technical founder and while I
found people willing to make (considerably) under their market value,
engineering is well paid and good make-problems-disappear non-technical people
are rare finds.

~~~
brilliantcode
if they are hungry and believe in your vision they will take equity and run
with it. Those are the people that should be involved early on.

~~~
mjolk
I'm years out of college, so unfortunately, most of my network of "known
entities" have financial obligations that need to be met.

------
anthay
I was one of the first employees in a UK tech startup. I was given share
options that I calculated represented about 0.5% of the value of the company.
When the company was sold about 10 years later, making the founders multi-
millionaires, I got about £30K. I was clueless and didn't realise the shares
could and would be diluted many times.

~~~
aedron
But the dilution happened because your company had to sell out a lot more of
its equity in order to succeed. You were not cheated. You could argue that you
should have been offered to buy into the additional financing rounds in order
to retain your share, but in all honesty, would you have taken them up on such
an offer?

~~~
cmdrfred
I think the issue is they probably offered lower than market pay and "half a
percent of the company" but what he ended up with was lower pay and .00025% of
the company. Sure it's all legal and his fault for not understanding the fine
print but I understand why he would feel cheated.

~~~
aedron
The company could have shut down, and he would have gotten nothing. Would he
have felt cheated then?

Instead they sold a part of the company (out of everybody's share) and with
the money that brought in, they eventually succeeded. I don't see anything
unfair in it.

~~~
cmdrfred
I think the moral of the story is rate equity like that as worthless and
refuse to work at a discount for it. These contracts are complicated and as a
programmer you likely won't completely understand them unless you get a lawyer
involved.

~~~
wcummings
Tech workers need an organization to provide legal services, most people I
know aren't empowered to have a lawyer review their employment terms. More
accessible legal help would create pressure on employers to stop bad
practices.

People on HN sometimes talk a big game about negotiating job offers, but in my
experience, most software engineers are _terrible_ at it, and are not equipped
to go up against enormous companies with a lot of resources dedicated to
paying them as little as possible.

~~~
HeyLaughingBoy
In my experience, most software engineers simply don't ask.

Forget negotiation. Just saying "I want $XXX" when interviewing for a position
is a simple thing to do. What's the worst thing they can do? Not hire you!
What's the best thing they can do? Give you what you asked for.

Is it really that hard to say "I really like the position you're offering, but
unless you can meet my salary requirements, it's a non-starter?"

~~~
danielweber
How long has it been since someone linked 'patio11's guide to getting more
money? If more than a week, too long, so:

[http://www.kalzumeus.com/2012/01/23/salary-
negotiation/](http://www.kalzumeus.com/2012/01/23/salary-negotiation/)

We should all read this once a year. Even if you can't take it all to heart,
whatever you read will help, and getting your colleagues to negotiate better
will raise your rate, too.

------
geebee
This has been linked to a few times on HN.

[http://danluu.com/startup-tradeoffs/](http://danluu.com/startup-tradeoffs/)

A quick summary: pay has gone up enough at top bigcos that simply working and
accumulating money can exceed even very good outcomes at startups.

~~~
edoceo
10 years at MS will make you a millionaire - in liquid assets

3 years at my startup now I have a million - on paper. Hopefully in the next
three there is an event I can cash out on.

One path is 99% chance One path is a 1% chance

I'm having more fun at the startup than I did at MS

~~~
gumby
> I'm having more fun at the startup than I did at MS

And as long as you can make your nut (housing, food, savings, some vacations)
I don't see a problem.

(edoceo I know you weren't claiming a problem -- I just wanted to reinforce
your point).

~~~
edoceo
This is a critical point I didn't address. If the startup business is
profitable and employees and founders can take reasonable salary it is sweet.
If no profits but you have outside funding for growth it's also pretty sweet.

When it doesn't work, no profits, lagging growth it's terrible. Really
terrible. Major stress, so much waste. And the sad fact is that's the likely
outcome of startup world.

You have to have two plans. One for the Best and one for the complete shit-
storm of winding down a business.

------
segmondy
Don't do startup for the potential payout. If you are not going to be happy
and content with the salary don't do it. Most won't have any exit. Any exit
that leaves one with $350k windfall beats many that leaves people with $0 and
jobless. Negotiate hard on the salary. Assume the shares are worthless.

~~~
Analemma_
The thing about this advice is, it basically reduces to "don't work for
startups". Because paying below-market salaries in exchange for equity is
pretty much universal. It's not even malice, most startups just don't have the
cash on hand to pay competitive wages.

> Negotiate hard on the salary.

Recent CS grads (who are the most common startup workers) don't really have
the leverage to the do this. And experienced (or, ugh, "10x") developers can
probably always get a better deal at a big company.

I feel like "working for a startup is almost never economically rational" is
the elephant in the room that everyone is trying not to talk about. (As for
me, I do take my own advice and deliberately work for BigCorp, but when I've
tentatively brought this up to others I'm usually met with hostility so I
don't do it in person anymore)

~~~
danielweber
The start-ups could do the very hard work to make sure that employees can
trust the stock options.

I've seen all sorts of games. One of the most common, which is surely a
violation of fiduciary duty but no one cares to do anything about it, is when
the VCs with 3 of 5 seats on the corporate board negotiate a sell-out that
matches, down to the dollar, the amount of money needed to make the VCs
represented by those 3 seats 100% whole, and not one dollar more.

In order for options to pay out, there are bunch of hurdles that all need to
be cleared in a row, with no mess-ups in between, and many of them are not in
your control at all.

------
preetish
Took the following from [https://medium.com/positiveslope/dont-get-trampled-
the-puzzl...](https://medium.com/positiveslope/dont-get-trampled-the-puzzle-
for-unicorn-employees-8f00f33c784f#.trvm56ujn)

"Another interesting idea to reduce complexity for employees came from Brian
Neider at Lead Edge Capital, who suggested a single question for employees to
ask management: “Can you please let me know how much money I’d make from my
options if the company were to sell or IPO for $100m, 200m, 300m, 400m, etc?”
Of course, the answers will inevitably have some disclaimers and dependencies,
but the answers will expose the potential impact of terms from late-stage
financings."

~~~
zeroer
As others have pointed out, this is impossible to determine without knowing
the dilution between today and the sell date.

~~~
edraferi
True, but this should be a straightforward calculation every time the cap
table updates. It can be very difficult to work out the implications of
preferences, ratchets, etc, but it's still just a math problem.

This should be a standard report off of cap table management software. Every
time the cap table changes, all current equity holders get a report showing
their stake and expected payout for various liquidity events.

~~~
rlucas
Well, except it's not straightforward, almost ever.

New investment rounds dilute the common share equivalent ownership, but also
add preferences and sometimes other economic rights. Also, banker fees,
earnouts, etc etc.

I don't disagree that it would be helpful and is a step in the right
direction. But it would have to come with tons of disclaimers.

And, even the best cap table management software is rather poor, and its calcs
get duplicated or discarded in favor of spreadsheets done by lawyers.

------
aetherson
If you IPO at substantially lower prices than you thought you were valued at,
or you IPO at a fine price and then shortly post-IPO, the stock value drops
considerably, then it _wasn 't a big IPO_.

Not to dismiss issues of employees being at the "back of the line" for equity
payout. That is certainly a thing. But this article lists a bunch of examples
of employees getting somewhat disappointing payouts when the ultimate
valuation of the company was _somewhat disappointing_ , while presenting it as
employees getting somewhat disappointing payouts from "big IPOs."

A lot of people seem to have a problem with understanding that you can't just
look at absolute numbers for a company's value. If your company raised a lot
of money with the expectation that they would be a $4B company, and then they
were a $750M company, well, $750M is a lot of money, but sorry, you had a
disappointing IPO and preference is going to eat up a lot of the company's
value -- maybe all of it.

~~~
danielweber
Employees usually have no visibility into preference, even when explicitly
asking about it.

~~~
aetherson
Sure. And I'm not saying that's not a problem, but here's the basic thing you
need to know about preference:

If your real valuation turns out to be lower than what you raised money at,
preference will eat a bunch or all of your valuation.

And this shouldn't really _surprise_ anyone. It's like some people at HN heard
the old joke "How do you make a million in publishing? Start with ten
million," and thought:

a. Yes, that seems valid.

b. Where's my share of the resulting million?

~~~
danielweber
"You only lose to preference in case of a lowered valuation" is true only for
1x preferences. For 2x preferences, employees can lose out even if the
valuation goes up, just by not as much as needed.

------
IMTDb
Dude earns $750K in 4 years what must have been probably very long hours but
with : No health risk. Not being confronted to violence in any way. No legal
risk tied to his profession.

Complains that he hoped he did enough work for a lifetime and that he could
retire, but that he actually still has to work.

This is not how this works. This is not how any of this works.

~~~
aianus
Ironically $750k is more than enough to retire if you're willing to move
outside the first world.

~~~
harryh
Lots of places in the first world too. At a 4% withdrawal rate (the rate many
people believe is safe to do indefinitely) that's 30k a year which is about
40th percentile in the US. That's not living like a King, but it's totally
doable.

------
lordnacho
Clearly there needs to be some sort of transparency about how many shares are
outstanding, what terms are for new investors, etc.

If people are misjudging their packets by 10x it would suggest they are being
underpaid, because they think they're negotiating for a lot more than they
are.

As someone who worked in options I can tell you there's a lot of depth to how
to price an option. If you don't know how Black-Scholes works along with more
esoteric subjects under option theory, you should heavily discount whatever
you're being told.

The exception is firms which have already gone public, where you can just look
up what the market thinks your shares/options are worth.

~~~
elmar
You can't use Black-Scholes on private company options.

~~~
lordnacho
But you can use some of the considerations that BS theory talks about.

People don't use BS theory for any other options either.

~~~
dx034
Yes they do. There's enough option pricing that is at least partly based on
BS.

~~~
lordnacho
Yes, partly based on, using the lessons from, slight modifications of, and so
on.

But I've never seen anyone try to claim that the BS formula was enough to give
you the right price.

And I've traded on more than one derivs desk.

~~~
sedachv
According to what I remember reading in
[https://mitpress.mit.edu/books/engine-not-
camera](https://mitpress.mit.edu/books/engine-not-camera) before the Black-
Scholes formula started being applied by traders, the market prices did not
correspond to the prices predicted by the model, because there was no other
mathematical model to price options, most of the trading was done based on
heuristics, and the market was highly inefficient. For at least the first few
years when the Black-Scholes formula first started being used by traders the
market converged on the predicted prices. As speculation and arbitrage
opportunities were identified, the prices of options diverged from the result
of the Black-Scholes formula, and other models were developed, based on the
Black-Scholes equation.

------
lostboys67
To put this in perspective some one who was in last years 5 Year share save at
British telecom made about half that tax free.

And this is the share options scheme for every one even the lowliest call
centre worker and not a senior role.

~~~
neffy
Even more perspective. Let's say hypothetically the salary difference came
down to being able to afford to buy a starter home in London versus renting
for that period. The tax free property appreciation would dwarf the return on
the options.

~~~
lostboys67
Don't think £200 a month would make that much of a difference

------
caniszczyk
financial literacy is a huge issue in society and especially startup land,
many folks don't learn about the pros/cons of 83(b) elections and how to
properly calculate the value of your options... also negotiation skills aren't
really taught so many people don't negotiate for a better deal

I found this repo on GitHub to be the best resource on startup equity, highly
recommend it: [https://github.com/jlevy/og-equity-
compensation](https://github.com/jlevy/og-equity-compensation)

~~~
danielweber
Hell, many years ago, before some of our HN readers were born, I co-founded a
start-up that had trouble recruiting people because we only created 200,000
shares at founding, and other companies were giving away _millions_ of
options. How could we compete only offering hundreds of options?

I don't know if the candidates were playing stupid, or really that dumb, or
trying to angle for something better, or just didn't like the company and were
trying to back out politely, but it got damn frustrating.

Lots of people just want to be lied to. You know why employers spew bullshit
to candidates? Because candidates eat it up.

~~~
user5994461
Adapt to your audience.

If you want not idiots employees, or if you want to do training for real, you
can explain it to them, then they're free to take a decision.

Is an employee good enough if he can't listen for 3 minutes and perform a
quick check on IPOverflow.com to confirm it's the other company that's a bad
deal.

------
seattle_spring
Not to detract from its message, but this article is from 2015.

Anecdotally, the expectation I had for my shares at my last startup ended up
being 10x (as the article stated) what they were worth after acquisition.

~~~
Eridrus
Did you figure out the breakdown of what ate into your expectations? Mostly
investor preferences or solution or an even mix of both?

~~~
seattle_spring
My expectations were based on forecasts given to me by the manager at the time
of recruitment, and those forecasts were far higher than reality. I believed
those forecasts mostly due to ignorance.

------
jartelt
I like that this article places a portion of the blame on the founders or
recruiters who try to hire new employees. In order to attract the best talent,
it is easy for these people to say everything is going awesome and the options
will be worth a million dollars. I think the blame for missed expectations and
dilution is often placed on VCs. But in reality, it's the founders and the
board who decide whether or not to take VC funding and who should communicate
clearly and realistically with employees to keep expectations in check.

------
charlesdm
Most people joining companies don't even get the entire capital structure
disclosed to them. There is no way to know exactly how much your options are
worth. You're trusting the company you're joining blindly, which can be a very
dangerous thing.

------
yueq
Companies should be more transparent about options they give to employees.

I was once offered with X shares of options from a well-funded startup. X
seems like a relatively large number. But the company didn't want to disclose
neither of the following to me but just selling me `this is a good offer`,

1\. percentage offered 2\. FMV per share 3\. strike price

The company is OK and the job is interesting. But this opaque destroyed trust
between two parties. This is a completely a joke and I turned down the offer.

------
grzm
(2015)

