
Hard Truths about Equity - ptbrodie
https://whilewest.com/4-hard-truths-about-equity-dfa2f24b3a6d#.pphh8235x
======
gjmulhol
Number 1 rule of working at a startup: really trust the founders and everyone
you work with. Look out for yourself, but at the end of the day, if you are
working with someone scummy, they can change the rules at basically any time.
So work with people committed to transparency and honest dealing.

Also, while it is nice to think of your particular startup succeeding, it
probably won't. And even if it "does" it will likely not be worth >$1b.

One of my proudest moments was hearing from one of my early employees that
even if the company tanked tomorrow that she would not regret it for a moment.
I hope that for every person I work with, because while I cannot guarantee
that the world won't collapse or something unforeseen to happen, I can work
really hard to make sure that as we grow and succeed, our culture is one of
making sure that everyone is learning and growing and going to excel in their
careers and lives no matter what happens to this company. Side note: I am also
committed to making sure that people here are compensated well when we
succeed, if for some reason our initial compensation structure, which I think
has been generous, has holes.

~~~
a-priori
Earlier this year I was was laid off from a startup that went bust. We failed
to find a market that could support us, and the investors lost confidence and
pulled the plug. It was the prototypical startup failure story.

Here's the thing: if the founders came to me tomorrow and said "I'm starting a
new company and I need developers", I'd probably join them.

Why? Because throughout the whole thing they acted absolutely properly. They
kept us in the loop about the company's situation as it deteriorated and did
everything they could to salvage the company and pivot into something new. And
we trusted them enough that almost the entire staff stayed on until the end
even though we were almost certain for a few months that the company was
probably not going to survive.

When the investors declined to reinvest, the founders shut the doors with
enough money left in the bank to pay a modest severance and keep a skeleton
staff on for a few months to wind down the company and service customers
during their notice period.

Some colleagues have told me stories of places they've worked where they
didn't find out the company was broke until their paycheques started bouncing,
the landlord started stopping into the office asking for the executives, and
those executives were nowhere to be found.

~~~
muddyrivers
Can't agree more. One start-up which I worked for a few years went bust. It
was an experience that brought up very complicated feelings of proud, pain,
excitement, upset, comradeship, disappointment, etc. Although it was painful
to accept the outcome, it was not surprising, considering the odds of success.

What I learned from the experience is: when you consider joining a startup, it
doesn't matter what products they are building, what market they are pursuing,
etc. What matters is the people you will work with. I learned a lot about how
to read people during the up-and-down time, about what people you can trust,
both their abilities and their personalities. If my ex-colleagues start new
companies and ask me to join, I will jump in for some people as long as I can
get enough cash to cover the living expenses of my family, and politely
decline for some others.

------
ChuckMcM
I've said it before but it is worth repeating, this article is spot on, and
the take away should be never ever ever join a startup because you want to
"get rich."

There are only three solid reasons to join a startup:

1) _You are passionate about the mission_ \- nothing is more rewarding than
engaging passionately in something you strongly believe in and endorse. Start
ups have license to pursue ideas that established companies simply cannot.

2) _It will improve your skill set_ \- There is only so much you can learn at
school or online, some skills have to be practiced to be learned. Start ups
can give you a role you want, even if your resume isn't a match. Which will
get you over the chicken and egg problem of you don't have experience in the
job you want to do to be hired in the job you want to do. That can get you
into a job elsewhere where the "entry level" position requires previous
experience.

3) _You will work with someone you respect_ \- Start ups are small, visible,
and stressful. Ask anyone to name 10 people they worked with a BigCo and 10
people they worked with at a startup, the latter is much easier. Stress,
higher highs, lower lows, creates stronger bonds. Those friendships will
follow you through out your life, they will help when you're looking for
advice or a job, and support when you are trying to pull off something really
hard to do.

If you choose to join a startup for one of those three reasons it will
_always_ deliver.

~~~
autotune
My thoughts on startups and equity is that you can't pay your current bills
with equity. The only way equity would make a difference in whether I joined
one startup or another would be if I received two offers with the same salary,
benefits, and point or points you've mentioned above, I'd pick the one with
more equity assuming it's preferred.

~~~
sokoloff
I've never heard of employees vesting preferred shares as part of their
compensation. Is that a thing?

~~~
autotune
Hmm I had initially assumed it was but now that you mention it and after
googling a bit more, it seems that's reserved for founders and early stage
investors (my practical experience with evaluating equity is limited). I
suppose I'd rephrase that to look for total preference to evaluate how much
whatever share the share of common stock offered would be worth as well as
total outstanding shares have been issued, and how many are expected to be
issued upon being sold or going IPO so far among other things.

------
steven2012
The point about only founders getting rich is one that is in stark difference
to the way Silicon Valley was pre-bust.

The first company I worked for went IPO a year or two before I joined. The
very first admin of that company got so rich from stock options that she
bought a vineyard and retired in 1999. Lots of people bought houses with the
money they made, including the first engineer who bought a house in prime PA.

I joined another startup just a few years ago, and they were extremely stingy
with options. "Less-important" people (ie. anyone non-engineers, or non-
management) were getting a few hundred or maybe a few thousand options, which
I thought was a bummer. I think everyone contributes to the success of the
company, and everyone should get a chance to do well if the company does well.
But I've seen this case several times where the founders keep everything for
themselves.

I'm not sure what changed, but it's probably reflective of how greedy and
self-centered SV is getting. It feels like it's more like Wall Street and less
about classic Silicon Valley, which is a shame. Go watch "Triumph of the
Nerds", the classic tv special during the dotcom boom and see if you can
reconcile the difference of those companies and the ones today.

~~~
akkartik
I suspect the cause is the shift in how startups are viewed in Silicon Valley.
Even though there've been startups here for a long time, they were always
considered risky, marginal and low-status. So the supply of potential
employees was low and the early payouts you're thinking of were paying people
for taking a risk.

Today startups are considered to be glamorous. They have access to a lot more
investment and potential employees. The whole country seems to be making a
beeline to pony up for the high rents because the salaries more than
compensate for it. There's no longer much risk of lost earnings. Is it any
surprise that the equity has gone lower? Arguably the valley as a whole has
taken the deal suggested in OP: more salary, less equity.

~~~
pc86
> _The whole country seems to be making a beeline to pony up for the high
> rents because the salaries more than compensate for it._

Only if you're at the top of the income bracket (for engineers in SF
specifically, not overall for the industry or area). The average SF developer
would be better off with an average salary in an area with reasonable real
estate prices and state income taxes.

~~~
Swizec
But in an "average" area I can't walk across the street to get a new job as an
engineer. There's a LOT of safety that comes from that.

------
amykhar
I was lucky enough to once be employed by a company that didn't promise me any
equity. They paid me a good salary and treated me well. The founder sold the
company after I'd been there for about 10 months. I was called in to speak
with him and given a nice check. (Still had my job too.) I'd much rather work
for a guy like that.

------
nostrademons
I think this article is missing a fundamental truth about life, and its
conclusions are distorted because of that:

 _You have to respect risk_. And ideally research it, quantify it, and manage
it. The one thing you cannot do is ignore it.

Joining a startup is risky. Founding a startup is even more risky. Taking
stock options instead of salary shifts more of that risk onto you, as an
employee. You need to be aware of this risk, and in that regard, all of these
articles about employee equity are performing a very valuable service.

But you _also_ have to view them in the context of the whole other portfolio
of risks you are taking in your life. The article, for example, says that the
chance of rain on the 1st and 15th is 100%. This is flatly untrue, as any
former employee of DEC, Sun, IBM, HP, Yahoo, Tandem, Stratus, Symbolics, or
other formerly-highflying tech companies can attest. It is a guarantee that
you _will_ get screwed over sometime in your working life, and the best
response to that is to learn from it and minimize the chance of it happening
in the future, or at least maximize the returns from when you _don 't_ get
screwed over to buffer your total returns.

------
jondubois
You need to make sure that the founders are good people. Most of them are not.

I can relate to the one year cliff and the economic incentive behind
terminating employees - Thankfully, the founders I worked for in my last
startup were fundamentally good people. I wouldn't hesitate to work with them
again.

As an employee, you are always at the mercy of the founders - So you'd better
study them carefully. I think the best sign of a good founder is that they're
usually easy to talk to - They're genuine people and they always talk to you
on the same level as any two human beings would, not as a mere employee.

Also, good founders are humble; I had no idea that the CEO of my previous
startup could read and write code until about 6 months in - He never said so.
I knew the founders were smart when I joined, but I didn't appreciate the full
extent until about one year later.

------
chetanahuja
Meta: Reading this thread is a refreshing change from the other ongoing thread
about Good Inc which is full of bitter diatribes about how horrible startups
are for everybody. I've been working in startups pretty much all my working
life and now am a founder of one. Some were successful some were not. The
successes added non-life changing but still non-trivial amount of cushion to
my bank account that allowed me to leave my full time job and work on my own
startup while taking minimal cash compensation from the company funds.

The fact is, the time I spent in a non-startup was nowhere near as exciting
and fun as the years I spent in various startups, even the failed ones. And
the successful ones were lucrative enough for me (none of which I was even in
the first 50 employees) to affect some life decisions. Just one person's
anecdata here but I started my engineering career 15 years ago and I read the
overly cynical, bitter postings with a sense of amazement. My experience
doesn't support any of it.

------
harryh
#2 is wrong.

I know it's fun to say it that way, but it's wrong. If you work at a startup
try going to your boss and saying "I'll give up all my equity for a $100/year
raise." They will say yes (modulo a conversation with you about how that's a
really bad idea for you).

It would be fair to say that a lot of people overestimate the value of equity
a lot of the time. But that's not the same thing as what the author says.

~~~
geofft
You can get a $100/year raise just for the asking. In tech, salaries are just
not negotiated at the $100/year granularity. Imagine saying "I'm also
considering an offer from this company, can you offer more" and the HR
department coming back with "Sure, we can give you $100/year more."

If you can get a $100/year raise just for the asking, and you can also get a
$100/year raise in exchange for equity, then simple arithmetic indicates that
the equity has zero value.

~~~
graeme
This is trivially wrong. You could get a $100 raise _once_ , and possibly
several times. But at some point, the boss would say "alright, no more
raises".

At that point, you could say "I'll give up all my equity for another $100", at
which point the boss would jump to agree.

~~~
bkeroack
> But at some point, the boss would say "alright, no more raises".

Not because $100 is too much, but because you've annoyed her by asking too
many times. $100 is still trivial in value to the business.

~~~
graeme
This still is refusing to consider the marginal case, which is what the OP was
asking about. At some point, even if asked the first time, a boss might refuse
a $100 raise. They would still take the $100 for equity deal.

The point was just a thought experiment to show that equity has more than 0
value.

~~~
harryh
Thank you.

~~~
geofft
It is quite something that the best objection HN can offer to "Equity has no
value" is "Surely it's worth at least five cents an hour."

OK, equity is worth five cents an hour. I admit it! Let's all negotiate with
that in mind.

~~~
harryh
I was making a rhetorical point against the idea that it was worth zero. I was
not attempting to actually put a value on anyone's equity.

It's quite something that you apparently couldn't tell the difference between
those two things.

------
blazespin
Overly cynical. The two times I worked for a startup more than 3 months I got
paid out for my equity. 2 for 2.

The problem is not equity, the problem is picking the right startup.

Everyone I know that has got rich has done so via equity.

~~~
TomBombadildoze
> Overly cynical. The two times I worked for a startup more than 3 months

So how many have you actually worked for? "2 for 2 [out of the experiences I
cherry-picked to rationalize my bias]" really doesn't support your claim that
the author is overly cynical.

> The problem is not equity, the problem is picking the right startup.

If only we could predict the outcome of the lottery, we wouldn't even need
startups.

~~~
blazespin
If you are thoughtful and careful and quit quickly at a startup that isn't
going anywhere / lead by jerks you can usually pick the right startup.

My point is that equity is great and it does everything it is supposed to do
(align motivation / create a great team spirit / reward risk takers). The
problem is people think that equity is magical and you don't have to worry
about the people giving it to you. They are the weak link - not the equity
itself.

------
askafriend
I think startups will soon be at a crossroads once the flaws in the equity
compensation system become more widely exposed. People will be dis-
incentivized from working at startups.

~~~
steven2012
They've been saying that forever, just like they've been saying "Silicon
Valley will suffer a brain drain because people will move away due to the high
cost of living." In theory it makes sense, but it never happens in earnest.

Working in a startup is much, much more fun that working at a big corporation.
I took a paycut several times to go work at startups just because working at a
big company where you work on a single API of one of their products gets
boring really fast, regardless of the pay.

~~~
xyzzy4
But at a big company you can also spend 2/3 of your time day-dreaming or
browsing the Internet. At a startup you need to be more engaged.

~~~
michaelmurray
100% agree with "2/3 of your time day-dreaming or browsing the Internet"...
however one can only take this for so long before going crazy!

~~~
peterjancelis
Do your own thing on the side. Much better than a few stock options. But make
sure to have your project excluded in your IP and non-compete contracts with
your employer.

------
aantix
And.... When the dealin' is done, you start to see that unless you're a
founder or a really close friend of the founder, you have no one to advocate
for you when the chips are divvied up, and you pretty much get to take or
leave the deal.

4 or 5 years, slaving away at a startup, weekends, nights. And at the end of
the party, you basically have zero say. Congratulations, hope you're best
friends with the CTO.

------
forgueam
"Thankfully, this is somewhat rare, though it does happen fairly often."

Wait, what?

~~~
potatolicious
The most infamous case of this was Zynga pre-IPO where certain employees were
pulled into a room and given the "give up your unvested equity and keep your
job, or lose both".

I'm not sure if it's common, but it's definitely not unheard of.

Anecdotally from conversations I've had with founders some are _very, very_
keen on cycling options back into the pool as much as possible. More
importantly I've heard some ideas on how to do this that made my skin crawl.

~~~
pc86
> _More importantly I 've heard some ideas on how to do this that made my skin
> crawl._

I would be interested in hearing these, as I'm sure many others would be as
well.

~~~
potatolicious
The most egregious and common one I hear is back-loading options vesting
(e.g., vest 5% in 1st year, 10% next year, etc) - note that Amazon already
does this, though standard is still linear. Dragging out the frequency of
vesting is also common to try and create as many unvested options as possible
when an employee chooses to leave the company.

One big takeaway I've had from these conversations is how many founders do not
see equity as compensation earned, but as some sort of gift to be granted to
the virtuous and loyal.

It's a little depressing that the frank answer to "why not vest quarterly" has
been "because if they leave we don't get as many options back". It's
interesting that we never think about cash compensation that way but do for
equity compensation.

------
rdtsc
> Anything of value can be traded for or converted into something of equal
> value. Equity does not have this characteristic. You can’t spend it, you
> can’t liquidate it, you can’t even trade it.

I like that quote. It really illustrates the problem well.

Or the idea that you'd offer them to get the salary bump based on options
value.

At the end of the day it is a gamble, a promise that _if_ the company gets
big, you _might_ get a big payout. The hope and dreams account for so much.
People will spend sleepless nights, working for 50% reduced salaries for some
hope. That is a nice opportunity for the founders -- sell a dream.

Sell it to investors.

Sell it to customers.

Sell it to employees.

Sell it to themselves.

The last is key, you have to believe your own lies to start really be
convincing to others.

------
kelukelugames
Love the article. Wish I read this before joining a startup.

Minor nitpick, please remove the number from the title.

------
frik
Reading the comments here, reading about "the good old days" before the dot-
com bubble burst... do we see early signs of another bubble? I sincerely hope
not.

~~~
wbillingsley
It looks like a different sort of bubble this time.

If I recall, in 2000, not only had valuations gone ridiculous, but there were
also a couple of big triggers for tech spending to drop -- phone networks
globally (big spenders) had overbid on 3G licenses and wanted to keep their
other capital spending down, and other businesses had just come through Y2K
spending. And the public imagination had lost rationality (press talking about
the new economy and price-to-earnings ratios not mattering, etc...)

This time around there's a cultural bubble among engineers (everyone wants to
do a start-up), some irrational unicorn-hunting, and a window where
governments are weak to VC demands for the sake of an innovation agenda, (eg,
Uber's making more headway on taxi regulations than would normally be the
case). But little sign that tech spending globally is likely to drop any time
soon.

There is also a slightly sad split in that some of the biggest unicorns are
technologically not very innovative (Uber, Slack) while innovation & high tech
spinouts from research continue to be a less spectacular slog.

But that seems a less worrying bubble for engineers (the number of engineering
jobs should still continue to rise, as more and more of companies business
models are defined by the tech they use, and so if they want to differentiate
their business they need to differentiate their tech)

------
jibjabjib
I joined a startup very early (#12) 2.5 yrs ago that had previously successful
and well-known founders. I took below market pay but ended up working out (now
valued around $500m) and believe they will succeed long-term.

I've since left but of course early employee equity was one of my top
considerations.

To join an early stage startup that you do not think will succeed and become
"big" should rarely be worth your time.

------
HillaryBriss
"The probability of getting rich from employee equity is almost zero, while
the chance of rain on the 1st and 15th is 100%."

