
Guide to Equity Compensation - DyslexicAtheist
https://www.holloway.com/g/equity-compensation
======
ditonal
Startup ISOs are totally broken, and VCs and founders would rather write 30
page treatises on all their complexities (of course, glossing over the 99 ways
to screw employees), than actually try to improve them.

A small percentage of people got rich off options a handful of times a long
times ago, and since then countless people have been screwed.

Public RSUs for stock you can sell immediately on the open market are
fantastic.

Common ISOs are toilet paper. At a _minimum_ you should get a 10 year exercise
window, and if the CEO tries to say that would make it so early employees can
hurt cap tables for future rounds, he's basically saying he doesn't consider
your equity grant to be real equity as it deserves to be clawed back for the
sin of not wanting to stick around for the 15 years it takes startups to IPO
these days.

These exact same people will try to convince you that their ISOs are a valid
subsitute to liquid RSUs, THEN say that they don't deserve to be "preferred"
instead of "common" because the VCs put in actual money (hint: so did you if
you turned down a public company to work at the startup. Biggest difference is
only that you're way less diversified).

Am I ranting? Of course, but if VCs and founders are going to continually
"educate" engineers on their equity offers, engineers need to stand up and
inform each other of the pitfalls. I know countless people, myself included,
who have been screwed by ISOs. You can actually lose money because the 30 day
window forces you to pay strike price + taxes on gains, then you find out that
the CEO sold the company at a bargain so liquidation preference kicked in and
he just took a huge retention bonus instead.

The way out of this mess is not Github treatises on how to evaluate your
equities. The way out is for engineers to continually tell founders/VCs that
they will pick public companies instead of startups until ISOs get fixed. If
ISOs screwed over VCs instead of engineers, they would have gone to DC and
gotten this fixed 10 years ago. At an absolute minimum you shouldn't have to
pay a dime in taxes until you've actually realized some money in your
checkings account. VCs/founders don't care because they don't have to care
because engineers are still too gullible and accept these bogus deals.

~~~
zyang
VCs and startup founders are shooting themselves in the foot. It makes very
little financial sense to work at a startup vs FAANG these days.

~~~
notJim
Yeah exactly. Early in my career, I loved working at startups, and aside from
compensation would prefer to do so again, but the opportunity cost now is way
too high. The one advantage I see at a startup is that if you pick one with a
decent engineering culture, you can learn a lot more than most FAANG roles
(although you'll probably learn more at the best FAANG roles than at good
startup roles? Unclear.)

~~~
alecbenzer
I think startups are a bit of a crapshoot even in this regard. You'll learn a
lot at a good one, but could potentially learn a lot of bad habits at a bad
one.

~~~
bradlys
> I think startups are a bit of a crapshoot even in this regard. You'll learn
> a lot at a good one, but could potentially learn a lot of bad habits at a
> bad one.

I've seen far more shit habits from habitual startup employees than those who
come from Big N. The people who come from big public companies are almost
always better at best practices and writing code than startup employees. I
don't believe working at startups really gives you good sense for
architecture, scalability, readability, or a variety of aspects of
programming. It's almost all about getting that short term dollar to get to
the next stage of funding. So, raw first time implementation speed gets
prioritized over all other aspects. I don't find many startups have very
strong technical voices either. CTOs frequently being product people in
disguise, etc. That's my experience...

~~~
spookthesunset
That is all true but you’ll get one thing working at a startup that you don’t
get at a big company. A sense of legitimate urgency. I’ve worked at both and
at a big company things are glacially slow and engineers love to build big
“enterprise” solutions to tiny problems that don’t need it.

At a functioning startup if you overbuild you die. Everybody working at one
knows this so people are much more pragmatic.

At a large company, your over engineered crap is lost in the noise.

~~~
bradlys
> That is all true but you’ll get one thing working at a startup that you
> don’t get at a big company. A sense of legitimate urgency. I’ve worked at
> both and at a big company things are glacially slow and engineers love to
> build big “enterprise” solutions to tiny problems that don’t need it.

The "sense of legitimate urgency" is a bunch of bullshit. It's just as made up
as it is at any other company. I've worked at startups from seed stage to
unicorn and a lot of the real urgent things aren't things that engineering
needs to do - it's other shit and usually has to do with partnering with
someone. And that usually isn't an engineering problem. Engineering is rarely
the blocker for things being rolled out. It's usually that product can't
determine what the right product is - business can't get the partners they
need - etc.

At a small company - your overengineered crap becomes the institutional
bullshit that holds the rest of engineering back for years because no one can
replace it because there's no time for refactoring. At least at a big company
you can throw away those solutions that don't work for people. At a small
company - it becomes the shit that holds you back from doing things
efficiently _for years_.

------
daenz
I worked for a startup founder and personally watched him screw advisers out
of stock agreements using different tactics, from technicalities in the
agreements to outright not honoring the agreements when he knew it was
disadvantageous for them to pursue him legally. He gloated about it and would
speak very highly of all the ways he could manipulate situations.

In the end, I left and the startup went under, and I told him directly that I
didn't trust him (to his surprise). The lesson that I learned was that I'd be
a fool to take equity in a startup, given all the ways I could be screwed, and
my lack of resources to pursue any legal recourse. Cash only, from now on.

~~~
fossuser
I think this is the wrong lesson and people are generally too extreme when
valuing this.

Are there risks with ISOs? Yes.

Should you value them 1:1 with cash? Probably not.

Should you value them at $0? Probably not.

People should make decisions based on the company, what they're doing, and how
much they trust the board/founders.

It'd be a mistake to categorically dismiss equity since that's the best way to
leverage your human capital into wealth.

It's also a mistake to think that equity is valued exactly at what the company
is advertising it as when trying to hire you.

There's some risk, but engineers should consider their options.

~~~
cbhl
I think the first thing someone should consider when looking at jobs is their
risk tolerance.

If you don't have two parents who are alive and healthy and own their home
mortgage-free, you probably have a low risk tolerance. Go work at a FAANG;
ISOs have an effective value of $0 to you.

If your grandpa can afford to give you $10000 to start a startup, or if you
can always move into your parents' basement when you become broke, then I
would think about a startup. You can tolerate owing hundreds of thousands in
taxes in the worst case, and the higher expected value (and higher personal
growth, in the early years) is worthwhile.

------
corporateslave5
Basically everyone knows by now, being an employee at an early stage startup
is a suckers bet. You’re literally working to make someone else rich. Just go
work for FAANG, or highest cash comp, and jam that money into tech stocks.

~~~
ska
This is often true from a raw compensation point of view, but it isn't as if
the jobs are fungible.

Nothing wrong with deciding a startup is best for you, so long as you are
going into eyes open and don't believe some nonsense like "the options will
make up for the salary difference".

------
xivzgrev
This piece is bullshit

“RSUs are often considered less preferable to grantees since they remove
control over when you owe tax.”

Who the fuck cares when you pay tax? A small % of people will have enough
value to worry about that. The vast majority of people tho have a bigger
worry: the stock is worth less than what they pay to exercise, because when
you leave your company you have to exercise em or lose em.

Dual trigger RSUs solve that. I don’t have to pay a freakin’ dime whether I
stay or leave. I keep my vested RSUs and ride off into the sunset and if they
someday become worth something, the company just withholds some shares to pay
the tax. Again no up front cash when I leave the company and no large tax
bill.

AND I get to keep the whole value of the share. For ISO you only get delta
between exercise price and strike price. If my RSUs are $5 or $15 apiece who
cares, it’s all risk-free gravy / upside. If I have ISOs I’m worrying about
strike price and whether it’s worth it to exercise.

I don’t know who in their right mind would want ISOs over RSUs.

------
auspex
I have had a number of successful exits but the bottom line is that you're
(probably) not getting nearly enough options to offset the risk.

Pasted from a comment I made in an earlier thread:

80% of startups fail and 20% succeed in some fashion. Which means if you
normally make $50,000 and take a $5,000 paycut (no rsu) to work there you will
lose $20,000 over the 4 year vesting period. 80% of the time when the startup
goes bust you make 0 on equity and still lost money due to the paycut. For a
total of 8x20 or $160,000 loss.

The two times you are successful you make 2xEquity.

This means your equity has to be at least worth $80,000 each time you
succeed.... just to break even.

Factoring in the risk of your equity being 0 you should be getting a LOT more
equity.

It's very similar to calculating expected value in poker.

~~~
GeneralMayhem
Doing EV calculation with personal finances is also tricky, because you don't
get repeated trials. In poker, assuming you have an appropriate bankroll, you
should be able to make risky but positive-EV bets hundreds of times, such that
you will realize that EV. For job choices, you're not going to get more than a
few cracks at it. You really need to be more concerned with risk of ruin,
especially when the ratios are greater.

The difference between FAANG and early-stage startups can easily be a 50% pay
cut, with at least 5 years until liquidation. If you have a 50% chance of that
bet paying off, then maybe it's okay - you can do this twice a decade, and
you're reasonably likely to end up at least even over a career. If you have a
5% chance of the bet paying off, even if the rewards are large enough to make
the EV even or positive, that's an insane amount of risk to take unless you're
already financially independent, because over a career you're not likely to
win even once.

This is one of the fundamental power imbalances between labor and capital:
Capital can diversify. To go back to the poker analogy, VCs are playing cash
games - they can take 100 bets of which they expect only 2 to pan out.
Employees are in a short-stack tournament - even if you make the highest-EV
play, if you're going to lose most of the time, you shouldn't be going all-in.

~~~
auspex
I really like the cash game vs. short stack tournament analogy.

------
jacobschein
So many of my friends have been screwed over by the technical nuances of
equity compensation.

Started Compound ([https://withcompound.com](https://withcompound.com)) to
solve this problem (we generate personalized analyses to help you understand
your equity – tax implications, potential value, etc).

If you have any questions/feedback, email me: jacob@withcompound.com.

~~~
wtvanhest
Just out of curiosity, how does compound make money?

------
borski
ISO + early exercise + 83(b) election + QSBS treatment is a massive win as an
employee. Very favorable tax treatment, but you have to early exercise, when
the strike price is equal to the FMV. If it were me, and I believed in the
company, I would value the equity highly, but make sure I negotiated a signing
bonus or similar that allowed me to early exercise. The 90 day window doesn’t
matter in that situation, although I will grant you that everyone’s financial
situation is different, and that having to pay for the stock at all is a
drawback. You also have to trust that the founders are going to have your back
and not screw you. This is a judgment and personality call.

Context: sold my company a month ago, all employees with options that had
early exercised got full acceleration, and even unexercised optionholders were
paid out as if they had exercised and been fully accelerated (though did not
get similarly preferable tax treatment, obviously). Treating the employees
properly (and well) was a massive part of the negotiation.

------
jaz46
I think the biggest gap that this guide and every one I've seen like it that
they undersell the positive value for employees of the Restricted Stock Award
(RSA). RSAs can be significantly better than ISOs in many situations.

There is no _actual_ reason why companies can only offer RSAs to founders and
super early employees. The taxes get trickier once the strike price gets high
enough, but employees should have the choice to maximize their equity value!

From the very beginning of founding my company and still 5 years later, we
offer our employees the choice to take their stock as RSAs, options, or a
combination of the two. We also teach a mandatory "Stock 101" course every
quarter for new employees that is a 1.5hr version of this guide. Too many
employees' (engineers in particular in my experience), don't actually
understand how their equity compensation works and I think it's the
responsibility of the company to educate them -- both for their current role
and possible future job offers.

~~~
choppaface
Can you offer any details on the tax consequences of offering ISOs versus
restricted stock? While there has been a ton of discussion of tax consequences
for employees, the corporate incentives are less clear and yet understanding
them is probably key for progress here.

------
cletus
So the tl;dr is:

1\. Startups take longer to IPO, if they ever (objectively true);

2\. Liquidation preferences for VCs and preferred stock for founders may make
a certain amount of sense (other comments have addressed this) but given (1),
this is generally a horrible deal for employees.

3\. Any employee should outright refuse to join a startup where the agreement
has any kind of clawback or any exercise period less than 10 years after the
termination of employment. If you're worried about diversity of ownership then
put in a right of first refusal into the contract. That's fair.

4\. E(TC) for a moderately qualified SWE at Big Tech is >$350k. Given all the
above if E(TC) at the startup really needs to be at least twice that (hint: it
isn't).

5\. For every story of a Google chef becoming a millionaire there's 10 stories
of a Mark Pincus type who threatens to fire employees if they don't surrender
some of their (unvested) options.

~~~
harryh
#2 is wrong. Founders don't get preferred stock. The link even says so:

"Typically, investors get preferred stock, and founders and employees get
common stock (or stock options)."

~~~
ummonk
Right, it's more that founders get sweetheart deals in acquisitions / funding
rounds.

------
pfarnsworth
The playbook for Equity compensation has changed dramatically in the last 20
years in drastic favor of the founders.

During the dotcom days, the number of shares that were given out was very
generous. I know secretaries that made enough from IPOs in the late 90s that
they could retire and buy a vineyard. Meanwhile I was a relatively early
employee at a YC startup that had a successful exit. The founders made 8
figures and I made about 80k over 4 years. I would have made 10x more at a
FANG with a regular comp package.

------
qaq
The prevalent advice here is don't invest in individual stocks, even though in
general you have a ton of information on a public company from financials to
track record of key players to good market and product info. With startups
it's suddenly OK to invest often half of your potential money into a stock
surrogate with none of the above. There are many reasons to join a startup
striking it rich from equity is def not a good one.

------
andrew311
Selling private shares / options on the secondary market is near impossible if
the company isn’t on something like SecondMarket. Right of First Refusal, Co-
sale Agreements, and the challenges of sharing information with a 3rd party
make this difficult. That said, has anyone succeeded and written about their
experience?

~~~
spurdoman77
If company is valuable enough smart investors will flock around the
shareholders who even have very minor ownership. I was sceptical at first but
then saw it happening with a profitable company I was following. I thought
people were stuck with their shares, but since the company was profitable it
attracted investors looking for better returns than public stocks.

~~~
ska
People show up when the risk gets low enough.

~~~
CalChris
De-risking is something a company will go through progressively.

    
    
      1. An idea? Risky.
      2. + funding? Less risky.
      3. + proof of concept? More less risky.
      4. + an MVP? Less risky still.
      5. + paying customers and metrics? Less risky again.

~~~
ska
Right. And when there is a bunch of illiquid stock around but the risk has
reduced enough people will sniff around for (or create) a secondary market.
Usually well past your #5 though.

If the risk is too high they are all happy to let you carry it for a while.

~~~
CalChris
If the risk is low then the rewards will be low as well. I think the problem
that VCs face in seed is the deluge of pitches. In A rounds, things have
settled down.

~~~
ska
We are specifically talking about secondary markets, though. They only really
happen I think when the risk is fairly low but people are illiquid, or
occasionally when the hype is insane.

This is a separate thing from the natural evolution of risk over startup life.
That happens to every one. Viable secondary markets letting you take some
money out early don't happen in most cases.

~~~
CalChris
Yes, you're right and I wasn't following that. I haven't had experience with
secondary markets. I had to wait a few years for an IPO and then there's the
lockup.

~~~
spurdoman77
> Yes, you're right and I wasn't following that. I haven't had experience with
> secondary markets. I had to wait a few years for an IPO and then there's the
> lockup.

If the company is valuable and you want cash out fast, then you can just send
messages directly to investors, if you have any contacts. There are always
some investors looking for that kind of deals. However it has to be
significant value, like 100k +. And naturally the price will suck, if IPO is
in the horizin it makes almost always sense to wait.

------
crimsonalucard
It should be known about a thing called clawbacks. If you don't read the
contract they could write something where that if at anytime you exercise they
reserve the right to buy back what you exercised.

A FinTech company I worked for use to do this. To my surprise even the finance
guys were in the dark are about the whole thing... nobody bothered to read the
contract. The company is called Neptune Financial and basically every employee
who works their is screwed in terms of equity compensation.

~~~
foobiekr
One of our potential investors pressed this very hard: “if they don’t stick it
out, why should they get paid?” and so on.

We rejected them and went with someone sane. but I was shocked. this was
coming from an upper-tier VC firm.

One thing I am happy about is we never took bad money. Our series A firm was
fantastic.

~~~
crimsonalucard
I'm ok with that reasoning if you do something like a vesting period with a
cliff at IPO. Make it clear tot he employee that the deal is... the employee
only gets something if they stick it out. The thing with clawbacks is it's
100% deception. The 1 year cliff and vesting are all deliberate lies and
manipulation.

~~~
foobiekr
I would not be OK with this policy even if it was spelled out, doubly so
because it was a prospective series C investor that wanted it added to the
existing (retroactively) and future options agreement. People often convince
themselves that startups will IPO or whatever because that's a pre-requisite
for joining one.

People don't always make great decisions. Part of being a good person is
accepting that caveat emptor is not an ethos that people should embrace.

I talked with an engineer - most excellent - who was employee 1 at a startup
that, at one point, became worth close to a billion dollars. He did not early
exercise because they flubbed their 409a evaluation and his share would have
been a $100k+ commitment at the time, and he'd just come out of two startups
back to back that had failed after he'd EE'd and gone to zero.

At year 6, he was absolutely almost ready to gnaw his own leg off, but he
stuck it out to the IPO. He was absolutely miserable, he wanted to go. They
would not convert his shares to NSOs and he could not afford the multi-million
dollar tax bill he'd receive if he ee'd then. Good thing, though. It was
grueling but he got through it and they did IPO.

And then they crashed to essentially zero before the lockup expired and he got
essentially nothing.

------
m0zg
Best advice would be: don't do this yourself. Hire a lawyer, have them redline
your stock compensation agreement. Cost depends on complexity, but regardless
of complexity it's insignificant in comparison to getting screwed by e.g.
vested stock repurchase rights, or not being able to exercise vested stock if
you're fired (which you likely will be, if the situation calls for screwing
you out of your vested shares, particularly if you stand to get a lot of
them). I paid less than $500 for the review. Initial version of the agreement
pretty much guaranteed I'd be screwed under all sorts of circumstances: from
leaving on my own, to getting fired for (possibly made up!) cause, to company
getting acquired.

If the prospective employer does not agree to the redlined version, walk away.
The founders and their lawyers will tell you it's what everyone else signs,
but don't believe that for a minute: founders and investors themselves have
different agreements, and "everybody else" are idiots if they sign something
as important as this without a legal review.

Remember, once that startup is worth something, that's when the knives come
out. And come out they will if your agreement is not 100% ironclad, which is
not something you can do yourself.

~~~
harryh
This is bad advice for the vast majority of startup employees (basically
anyone who is not an executive, and even most executives) because companies
(rightfully so) will not accept redlined stock agreements for individual
employees. In which case the employee will have paid a lawyer a bunch of money
for for nothing in a way that is entirely foreseeable.

Deciding that working at a startup (with the comp structures that come with
that) isn't right for you? Totally fine. Startups aren't for everyone.

But don't go waste money on a lawyer who's work will 100% for sure just get
thrown in the garbage.

TBH any lawyer who even takes this work is either bad (because they don't
realize the work is a waste) or a scammer (because they know and don't care).

~~~
JamesBarney
Even if most startups won't accept a redlined contract it's a still important
to understand how much your compensated and what the terms are, and $500
doesn't seem like an unreasonable amount for that.

Hacker news is filled with stories of individuals who worked very hard for
very long to make a company successful and their compensation was far less
than they understood when they signed their contract.

See Toptal for an example.

~~~
harryh
I agree!

Asking a lawyer to read a contract and explain it to you: totally worth it.

I will actually clarify even further and say that redlines on employment
contracts are definitely possible. It's really just for equity agreements
where you aren't going to make any headway.

~~~
JamesBarney
Oh ok I misunderstood you, that makes sense.

Yeah, my understanding is the same as yours that equity agreements are the
hardest items to negotiate. So hard it's probably impossible unless you would
make a strategic impact on the organization.(like you're an executive or one
of the top 20 nlp experts in the world)

No founder wants to explain to a potential investor how their equity
agreements work and then have to continue with "except Joe"

~~~
m0zg
>> "except Joe"

Very easy to avoid this: just don't put abusive clauses in there that Joe's
lawyer will inevitably redline, and don't count on him signing it without
checking with a lawyer.

~~~
JamesBarney
The point is that by the time your lawyer is redlining the contract it's too
late and too painful to change.

So your options as a potential employee (for 99% of cases) are ask for
something else to offset the onerous terms like more equity, vacation, or
salary or find another company.

------
sp527
There should be a federal law prohibiting issuing any type of equity
compensation (including options) without also routinely reporting relevant
details (ownership %, FMV, dilution, preferences, etc) to holders. The single
biggest problem with options is that the cap table is completely opaque to
employees and the founder is incentivized to operate as a lying sack of shit
redlining the reality distortion field.

------
sbilstein
As always, the best time to join a startup is when it’s raised several rounds
and you are at least a staff engineer. You’ll get a million or more over a
four year vest and much higher chances of IPO which if it’s good, it may 2-10x
your stock.*

Unless your Uber and than a lot of those folks got fucked. Shrug.

~~~
usaar333
Agreed on later stage; disagree on need to be that high level. High growth
companies are actually better for lower leveled engineers as they can grow
faster.

------
zyxjih
Is there any way to confirm that the IRS received my 83(b) and processed it
correctly?

~~~
harryh
Send them two copies as well as self addresses stamped envelope and a letter
requesting them to date stamp one copy and send it back to you. They will do
so.

------
zalzal
Josh here (one of the authors). Do also feel free to read the latest version
of this at [https://www.holloway.com/g/equity-
compensation](https://www.holloway.com/g/equity-compensation)

It's the same source as what you can find on GitHub but at Holloway we're
working to make long-form docs like this easier to read on the web. PRs or
feedback here on the Holloway reader welcome. :)

------
burnJS
This couldn't have been posted at a better time for me. I've been talking with
some people more in the know on this and was advised by someone to ask for a
revenue share in addition to my equity. This person felt the equity offering
was low and I should protect myself with a revenue share. Does anyone have
resources or additional insight on rev share agreements?

------
wdb
Equity compensation is like your bonus. The chance you are getting it is low
so shouldn't be taken into account. Maybe I have burned too many times by
discretionary bonuses :)

~~~
kccqzy
This definitely differs but many companies give out annual bonuses to pretty
much everyone.

~~~
wdb
My experience they always come up with a reason not give you a bonus. Hence I
never consider it to get it.

So when a company says we can't offer X but you get 10% bonus each year so you
make your old salary Y. I will just pass because I will end up taking a pay
cut

------
fhrow4484
Regarding private companies' RSUs, anyone here has heard of a company eligible
for and opted-in 83(i) elections? (Which lets the employee defer tax for up to
5 years)

------
juliend2
I wish there was a canadian version of this.

~~~
ska
Canadian isn't much different really in practice, but there isn't an 83(b)
equivalent iirc. The specific tax detail vary, but from 30,000 feet it looks
pretty similar.

Overall it's pretty comparable to the non-SV US. There is less VC & PE money
floating around (generally investment is more conservative). Common stock
options or grants are going to be a gamble for the same reasons as in the US.

Tax wise, you capital rates rather than normal (i.e. 50% treated as regular
income). You may get a gain/loss relative to FMV in year you exercise, same as
US.

Most of the advice carries over directly, mutatis mutandis.

------
ycombonator
What’s a typical equity compensation for a mid level contributor in a post
series A company ? Val ~ 30mm

~~~
sk5t
Given nothing more to go on, maybe 5 to 10bp.

------
yread
Is there a guide like this for founders? Or late coming cofounders, early
c-levels?

------
emersonrsantos
How about LLCs? Any guide?

------
mmxmb
Another good resource: [https://www.holloway.com/g/equity-
compensation](https://www.holloway.com/g/equity-compensation)

~~~
QuinnyPig
It’s the same data, built by the same person (jlevy).

------
weisser
This is the old version of The Holloway Guide to Equity Compensation which you
can read here for free: [https://www.holloway.com/g/equity-
compensation](https://www.holloway.com/g/equity-compensation)

~~~
dang
Thanks! We've switched to that from [https://github.com/jlevy/og-equity-
compensation](https://github.com/jlevy/og-equity-compensation) above.

