
Think about Equity - econner
http://foundersatwork.posthaven.com/think-about-equity
======
geoffreyy
I think more and more people know about equity. We should focus on making that
said equity more liquid for private companies.

So many founders get rich early by selling their stocks to investors when
raising money. Most of the time, employees just can't because the board won't
let them.

If we allow employees to sell their stocks after they are vested you reduce
the amount of risk they take when accepting a lower salary for higher equity.
It would also stop the mentality of considering equity as zero when evaluating
offers and give more financial flexibility to employees.

There is so much money circulating in private markets, but employees just
can't access it. This seems pretty unfair to me.

~~~
alsocasey
> There is so much money circulating in private markets, but employees just
> can't access it. This seems pretty unfair to me.

Isn't this almost certainly by design?

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equitylottery
Startup equity is like a shitty lottery ticket that you most likely won't be
able to cash out even if you get lucky.

I passed up on google to be one of the first employees at a promising startup
that ended up raising high 8 figures and is now at nearly 100 employees. I
took a pay cut for that equity and worked 12 hour days alongside the founders.
With liquidation preferences and dilution I won't even be able to take a
vacation with that equity if there's ever an exit.

My college friends who picked Google are now making >$300K and have enough
money in the bank to have a diversified portfolio and acquire the right type
of equity.

So unless you're a founder or an investor ignore the equity. You can still go
for a startup but do it for the experience and potential to have a real impact
on an organization.

~~~
throwaway84742
> So unless you're a founder or an investor ignore the equity

2 years ago I would have told you you’re full of shit, but I’ve since been
through this myself, and I can confirm: this is 100% right. Even in the
unlikely event the startup exits, and even more unlikely event that it exits
at $100M+, typical non-founder stakes do not offset the partial loss of cash
and RSU income, particularly when one factors dilution and liquidation
preferences into account. Took me 2 years to snap out of it. Never again.

~~~
deanmoriarty
Hi, could you share a bit more the numbers on how you ended up with so little?
In particular, what percentage did you initially have? What percentage did you
have in the end? What was the liquidation factor? Was the business in general
successful or did it have to accept compromises like raising with unfavorable
conditions to survive?

I am at the 5th year in a growing startup where I was employee < 10 with
initially 1.5% which became ~0.8% after 3 rounds of funding (~60M$) all at
liquidation preference 1. The startup is now 150 employees and valued ~200M.
Equity has been painfully exercised so I can both leave if needed, as well as
her long term capital gain one day (or should I say capital loss?)

Thanks

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SanFranManDan
In order for equity to be worth it for employees at a Startup you need to be
within the first 10 people and the company needs to be north of the
$500,000,000 range.

To illustrate, give the best odds. You join within the first 10 people, get
0.7%, after 6 years of dilution you might be down to ~0.2%.

If a company runs a tender offer with a valuation of $200m, your stock is
$400,000. Is that a lot? Well considering you probably make 50k-100k less per
year in salary at a startup vs a "big company", for 6 years time and
considering that you also get other compensation at a big company, that isn't
really that rewarding.

Now at $500m, your stock is worth $1m. Its now something worth 6 years of
paycuts.

But this is such a narrow window. You have to get lucky to be one of the first
10 and join a company that will be worth half a billion dollars.

If you are not one of the first 10, you need the company to be worth
~$5billion to have your stock be worth it. How many of those are out there?

~~~
matchagaucho
$1M in stock sounds great... until you realize it's actually $600K after
taxes.

With a 4 year vest, that equity is worth $150K per year. About what a Top
Engineer sacrifices in salary to go work at a start-up.

~~~
tptacek
Nitpick: that salary is also subject to taxes.

~~~
forgotmysn
as is the vested equity. not to mention the cost of exercising the shares

~~~
tptacek
Right, he started by pointing out the tax haircut of equity. But he moved the
goalposts when he compared the nominal dollar cost of foregone salary to the
after-tax value of the options.

It's a nitpick. The underlying point stands.

------
pjungwir
> If you go to work for a big established company, they won't give you part of
> it.

On the contrary! Just yesterday I got an email from an Amazon recruiter that
says:

> We also offer:

> \- Stock Package, free shares given to you (no purchasing required)

It seems like it's pretty normal for people to get equity from big companies.
Not even just tech companies: people I know working at Nike get stock every
year too.

Also I question this:

> The fifth employee will get much more than the hundredth.

Maybe, but the thousandth will get "more" than the hundredth if you measure it
in dollars times probability-of-cashing-it-out. VCs talk about how the size of
the pie matters more than the percentage of your share, and I think that
applies here too.

~~~
gberger
> It seems like it's pretty normal for people to get equity from big
> companies.

Right, but equity at big, established companies generally isn't worth
potentially $1M+. From what I've seen, it's around $20-50k/year and a
calculated part of the compensation package.

~~~
paxys
Disagree with that. In recent years you are way more likely to make $1M from
stock grants from companies like Google, Facebook and Amazon than even the top
startups.

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nightski
It has been drilled into me that the #1 rule of investing is proper
diversification. If that is true, startup equity kind of goes against that
grain? It's asking to place all the eggs (your productive time) into one
basket. That's not much different than a salary except much higher risk
without diversification.

Even ycombinator does not fall for that, they invest in thousands of companies
and they have a lot less to lose than many employees.

~~~
connoredel
Here's the way I look at it. Once your 401k or other retirement savings are on
track to give you a comfortable retirement, that's like an option -- you are
effectively guaranteed a minimum lifestyle. Within this bucket, you should
certainly be balancing the expected value and risk "by the book"
(diversifying, etc.).

How do you increase the value of an option? Increase the volatility.
Continuing to minimize risk is not going to meaningfully change your
lifestyle. Your call option already protects you on the downside, so you
should try to blow it out on the upside, and take a risk.

You can also view your experience and skills (and the minimum salary it allows
you to command in the market) as the same thing. After a certain point, try
for something that will meaningfully change your lifestyle. Worst case, you
can fall back to that floor salary.

~~~
closeparen
This is an argument to invest the value of your equity in a bold bet. It
doesn’t say why that bet ought to be _on your employer_.

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anonnel
The real truth is that equity is primarily used as a way for startups to pay
lower salaries. 3 and 4 year vests further reduce the likelihood you will ever
see the equity offered. Let alone that you will have usually a one month
period to put up the purchase price of your options. So if you don’t have an
extra 2-10 grand lying around (because you were given equity instead of
salary, for instance) you will forfeit your equity. Founders and execs also
get waay more equity than than the code monkeys, and exercise priority.

I’m not saying don’t think about equity, but don’t let someone sell you a bill
of goods either.

~~~
rco8786
2-10 grand is way low. I’ve bought out my equity from two startups and they
were both over 15k despite only vesting a small portion of the overall grant.

~~~
lutorm
Yes, especially if you wait a while and get hit with the massive ISO exercise
AMT tax because the fair market value is now high. I've paid well over $100k
in AMT because of this.

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aston
Another way to frame this is that it's easier to get rich via your investments
than your direct labor. Working at a company that is willing to give you
equity is a funny sort of investing: you're investing your time rather than
your money.

That the world pays off equity in a company orders of magnitude better than
labor for a company is the real thing that will complicate a young person's
worldview.

~~~
munchbunny
There's an important caveat to that though. If you pick an early startup to
make your bet, there is a very real (and more likely than not) chance that it
won't pan out despite your best efforts and the team's best efforts. And then,
like with stocks and other investments, this comes down to your ability to
pick the winners.

------
rabidrat
I exercised my options for $500 when I left a startup in 2005. They finally
got bought by a large company this year. The amount that I'll be getting: 48
cents. Total.

Early investment is virtually worthless without subsequent investment.
Dilution means the last shark gets the spoils. If you're still there when the
shark has done eating you might get some scraps.

------
throwawayeq2
In support of the article, and in contrast to the “assume equity is worthless”
HN conventional wisdom, at my current job I’m vesting seven figures of equity
every year at our current valuation, and have been since the day I started.
What worked for me in my latest job search was focusing on companies that had
a very small headcount relative to their valuation, although there are other
filters you can use like those Jessica mentioned.

The nice thing about working for a company that has raised a bunch of money
but is still quite small is that you don’t necessarily have to sacrifice
salary either. When I joined I got a 50% raise from my previous base salary at
a big 5 tech co without negotiating.

~~~
phamilton
Liquid equity?

~~~
throwawayeq2
Nope, illiquid, so it’s still something of a gamble (although in my opinion a
much surer thing than the average startup). So the expected value is something
less than the nominal figure, but still very large, with some variance.

EDIT: I’ve also heard there’s a secondary market for private co equity that I
could maybe use to liquidate early if necessary, but I don’t know where that
stands legally and don’t even know who is talk to to figure out if that’s an
option.

~~~
equitylottery
I'm also rich on paper.

~~~
throwawayeq2
Based on the details provided in your sibling comment, sounds like you aren’t?
I don’t think our situations are the same.

~~~
equitylottery
I started out with around 1% of a company that's now valued at a few 100
million dollars. I just don't see it going public and if we do get acquired
I'm not sure I'll see much of it after the investors get paid.

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jv22222
I’ll just say this. There are a lot more stories of equity not working out
than there are of equity making folks rich... so be sure to do deep research
about this subject and also on the co. you are getting involved with.

~~~
tlb
And there are several billion stories of wages not making people rich.

Beware the availability bias here. Nobody tells their story of working for
salary all their life and not getting rich because that's not newsworthy. It
is news when people work at a promising startup for equity, but it fails. So
people fall victim to the bias of thinking there's more of a problem with
equity than wages, because that's the failure case they hear about more often.

The risk of not getting rich from wages is 99.9% (number of 9s depending on
your definition of rich). The risk of not getting rich from equity in a series
of promising startups over a career, can be less than 50%.

~~~
Hydraulix989
It's a bit of an unfair comparison. Usually the certain kind of people that
have what it takes (however likely it may be) to "get rich" from their sweat
equity are also likely to command very high salaries at top companies (in tech
or investment banking). The former is a much riskier proposition, of course,
and the end result might have looked similar when you take in account dilution
and the like.

As a founder, that dynamic completely changes, of course.

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bitL
Be extremely careful if somebody offers you a share in LLC first, but later
presses to convert to C-Corp, giving you Class B/non-voting/non-privileged
shares. Even with the same % as you had with LLC, it's a highway robbery for
multitude of reasons. Some large companies, loved over here, are surprisingly
doing this with their spin-offs, threatening non-compliant employees with
legal action if they don't sign the transfer. Stories I was told...

~~~
eldavido
Dude seriously what the hell are you talking about?

Almost anyone who gets employee-level equity in a standard DE C corp will
receive such a small piece that the voting rights are largely irrelevant. I
was a sub-1% shareholder in a recent M&A transaction where a place I'd worked
was getting acquired. I didn't like the terms. Too bad it mattered exactly
zero what I thought.

The real question is why a company that's taking a bunch of capital is
incorporated as an LLC? That's a rookie mistake no founder associated with any
reasonable incubator or investors would make.

~~~
bitL
Sometimes you get >= 1%. That's when the fun, or "Game of Thrones" starts,
once vesting period nears its end. You'd be surprised how many "decent"
management people turn into monsters once they sense more equity for
themselves by tricking you (i.e. getting preferred stock for themselves,
giving you a type with the lowest liquidation preference etc.). LLCs are often
used for early stage private companies with a single investor (e.g. a large,
well-known company), not those that want to go public.

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drchiu
Think of equity like buying a call option for pennies and having them explode
to dollars or tens of dollars per contract. It may (and likely will) expire
worthless, or the leverage from it is so great that you exit with a great
return. As the post alluded to, starting a startup has gone from extremely
rare to rare. And the number of startups that succeed in a significant way are
less than that.

------
eldavido
I have a slightly different take on this.

While I agree with the general idea that there are more ways than wages to
earn wealth, I think the advice is more general: focus on ownership. Figure
out how to buy or create an asset and work on improving its value through your
labor, capital, or other real (non-financial) forms of investment: time,
attention, promotion, whatever. This advice is surprisingly general and has
made a lot of fortunes. Think in terms of the business being an economic
machine, and you as its tuner (devs will be surprisingly used to this view of
things).

House flippers focus on ownership by buying a house, improving it, and then
selling it.

Private equity acquires companies, "fixes" them, and then sells them, often
back to the public markets.

Venture capital acquires promising stakes in young companies. They put in a
lot of sweat equity in board meetings, advice, introductions, and follow-on
fundraising to make their portfolios worth more.

Anyone who owns a house gets rich if their house appreciates. Especially if
they use leverage.

You can do this all sorts of ways. Build vs. buy is an important dimension.

Where I disagree with JL is the general idea that investing heavily into a
single company with high uncertainty and little control rights is a great
idea. The main reason YC took off is largely Jessica in my opinion, marketing
the program exceptionally well to talented people who knew no other way than
to work for wages at a company. It worked great for them (the YC partners)
because they became investors in 1000+ companies, so it's virtually certain
that, given the caliber of people they're able to convince to apply, that
they'll have a few billion dollar "hits". The situation of an individual
employee with only one company's (startup's) stock is quite different, and in
my opinion, much worse. So maybe not such great advice at face value.

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codingdave
> A lot of people who get rich these days do it via equity, not salary.

Yes, true.... but many more take pay cuts for equity that ends up being
worthless. Equity is the way to get stinkin' rich, if you are lucky. But a
salary, alongside proper savings and investments, still gets you rich enough
to not have to worry too much about money later in life.

------
RestlessMind
> Another way to predict which startups will succeed is to look at where your
> peers are going. Have several of the smartest people in your graduating
> class ended up at the same startup? That's probably a company worth
> investigating.

So which is the hot company these days where all the smart folks are going?
Asking for a friend.

~~~
joeblau
Coinbase, Uber, AirBnb, Pinterest, Lyft are a few. Look at where the tech
media is focused on right now. Sharing economy, Social Media, Ride Sharing,
AR/VR, Cryptocurrencies, and companies working with machine learning. That's
where you're going to find smart people flocking.

~~~
askafriend
To add to this list: Stripe, Nextdoor, Robinhood, Flexport, Thumbtack,
Opendoor, etc

~~~
jiveturkey
yes but by the time they are newsworthy they aren’t option lottery ticket
worthy. unless you are coming in as VP.

~~~
joeblau
I totally agree. That's really what makes picking extremely difficult. It
takes a lot of due diligence when searching for an opportunity to figure out
which one is going to be great for your financial future. You also have to
_want_ to work there for 4 years (typical vesting window) if you plan on
collecting all of your equity.

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jiveturkey
I think this article is wrong wrong wrong. because it’s putting equity first.

options are a lottery. do what most inspires you. it will give you the most
satisfaction and also the most skill (doing what you love and being really
good at it go hand in hand). _Then_ figure out if a startup is right for you
for all other reasons.

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zitterbewegung
How to think about equity for me: either believe in what you are doing as a
founder or get market rates while getting equity anytime else. Unless you are
a founder you probably will be outmanuvered on your ability to exercise your
option .

